Steve Johnson

Australian investors looking for local market returns are benefitting from a strong rise in M&A activity in 2021, with further opportunities on the horizon in the second half of the year, according to local specialist equities manager Forager Funds Management.

The manager’s Australian Shares Fund has benefitted from a growing number of mergers and acquisitions, as companies reposition themselves for growth in the post COVID-19 landscape. Forager runs concentrated portfolios investing in the Australian equities market as well as international shares. Both funds aim to invest in undervalued businesses, with a long-term time horizon.

A stronger than expected local economic recovery is expected to fuel further opportunities through the year. This sentiment is echoed in the Reserve Bank’s May outlook, expressing that the Australian economy is “transitioning from recovery to expansion phase earlier with more momentum that anticipated”^[1].

In addition to the strong economy delivering better than expected profits, Steve Johnson, Forager Funds Chief Investment Officer, said key drivers include strong balance sheets and cheap debt. “We can also see that new management teams are helping to cut unnecessary business costs, winning contracts, and making important acquisitions,” Mr Johnson said.

On the acquisition front, family tracking company Life360 (ASX:360), held within the Australian Shares Fund, announced it will acquire Jiobit, a provider of location devices for children, pets, and seniors.

“Despite most of the world still being impacted by COVID-19 lockdowns, Life360 has shown strong core business growth in the first quarter of 2021. This is aided by the US vaccine rollout processing rapidly in Life360’s most important market,” Mr Johnson added.

Forager’s Australian Shares Fund (FASF) rose by 13% in April, bettering the All Ordinaries Accumulation Index’s 4% return.

Gains in the firm’s Aussie equities portfolio were widespread but the Fund’s investment in specialist fund administrator for financial services, Mainstream Group (ASX: MAI) contributed to the lion’s share of the upside for investors. As Mainstream’s largest shareholder, over a five-year ownership period the shares traded at less than $0.60 but have reached $2.65 during April.

“Shareholders in Mainstream had a month to remember,” said Mr Johnson. “A bidding war between the two global behemoths, Apex Group and SS&C, has seen the share price soar and investors will reap the rewards of this bidding.”

“A buyer was needed to unlock the strategic value of Mainstream, which was not being reflected in the share price,” added Mr Johnson.

The Fund also saw software service company MSL Solutions (ASX: MSL) having its share price set alight by a new management team, an important acquisition and new contract wins.

“What we’re seeing here is a rapidly different market to the last 18 months. The environment remains extremely conducive for deals and investors should benefit from the uptake in M&A activity. We haven’t seen an M&A market like this for a while,” he said.

Global markets starting to open up for investors

Forager is still seeing strong growth in its International Fund (FISF), with the Fund returning 8.05% in April, benefitting from several countries re-opening after strict COVID-induced lockdowns.

The Fund is exposed to the reopening of the UK economy and is experiencing strong returns from stocks including Lloyds (LSE:LLOY), Card Factory (LSE:CARD), Motorpoint (LSE:MOTR), and lastminute.com (SWX:LMN). Early data indicated that retail sales are up, restaurants sales are increasing and companies are hiring new staff.

However, the Fund’s social media holdings did not fare as well. Pinterest’s US user numbers are expected to decline in the coming months as people spend more time outside their homes. The market also expected more from Twitter’s first quarter results than the company delivered.

“It’s been an exciting couple of months globally and we continue to look at a raft of new companies that will help generate above-market returns,” said Mr Johnson.

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[1] Reserve Bank of Australia, Statement on Monetary Policy May 2021, Section 5. Economic Outlook.

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Steve Johnson

Retail investors have been increasingly rewarded with solid investment returns over the last year because of retailers benefiting from a ‘COVID spending economy’, a trend that Forager Fund Management believes will continue through 2021.

Retailers including Australian brands Shaver Shop and Motorcycle Holdings, and international brands Boohoo.com and Whole Earth Brands, have been a significant contributor to the strong performance from the Forager International Shares Fund (FISF) and the Forager Australian Shares Fund (FASF).

Both funds have outperformed their respective benchmark indices^[1] since inception with FISF returning 54.45% over the past 12 months and FASF delivering a one-year return of 34.52%.

“We are seeing really healthy profits, dividend resumption and growth from Australian companies, and retail investors are really responding to that,” said Forager CIO, Steve Johnson.

“Even outside of the COVID spending economy, tech and marketing and media companies, such as RPMGlobal and Enero Group, are also pulling in strong sales figures despite the projected losses. It is a sign of a healthy state of the underlying businesses and continuing an attractive value on offer for investors.”

Investors looking to international growth opportunities

Forager is seeing strong growth from its International Shares Fund (FISF), which is up 48% since end of June 2020, and according to Mr Johnson, one of the primary reasons is because of their ability to move quickly when needed.

“We have had some huge growth opportunities with certain stocks in the fund, but because of how aggressively they have grown, the risks of substantial falls have become too high – some have seen share prices rise threefold in the last year,” said Mr Johnson.

“We look at an investment horizon of three-to-five years but markets and individual stock prices have been moving at a speed we have not experienced many times in our investing lives Companies like energy drink Celsius, Uber and Ulta Beauty have all fallen into this aggressive growth category and as a result we have sold.

“Some of our replacement companies – the new seeds in our portfolio – are those that are sensibly priced we are confident we can grow rapidly. Names like Boohoo and Twitter, that resonate well with retail investors. Airline Skywest is another business that was unloved but is now holding its own with its share price rising 45%.

“A balance between undervalued stocks growing rapidly, and attractively priced and defensive assets growing at more moderate levels is the sweet spot for investors,” added Mr Johnson.

The outlook for 2021

Mr Johnson believes that there is good value to be found in global markets, and investors will be able to take advantage of a post-COVID 19 world.

“We continue to look at exciting new companies that will help generate above-market returns while offering investors a new and unique opportunity to invest in something that resonates with them.

“A growing business can be a wonderful thing, but the starting price always matters. Sometimes it pays to cut the flowers and plant a few seeds,” added Mr Johnson.

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[1] FISF is benchmarked against MSCI World Net Index. FASF is benchmarked against All Ordinaries Accumulation Index

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