Inside the mind of Forager investment chief Steve Johnson
Steve Johnson is widely acknowledged as one of Australia's finest fund managers.
As the chief investment officer and major shareholder of boutique firm Forager Funds Management, he was named one of AFRs young guns of 2014, and his star is set to rise higher next month.
Forager Australian Shares Fund is expected to list on the ASX in December with a valuation around $150 million.
The company manages more than $280 million in funds, with an exceptional investment track record: 16.35% over the 12 months to October 31 (versus 6.63% for the All Ords Accumulation index over the same period).
Over five years the fund returned 21.51%pa compared with 12.48%pa for the index.
In a Money exclusive Johnson reveals what he's buying now and why.
How do you look for new opportunities?
We do the things that many fund managers do like running filters over the market (for various ratios), looking at 52-week lows and reading the financial press.
But hunting for new ideas needs to be a state of mind as much as a process.
Our best investment ideas have come from a unique insight into a business. You need to find an angle that the rest of the market hasn't found, and that tends to come from keeping your eyes and ears open.
Anyone can extrapolate last year's earnings into the future and argue about the growth rate. But you make the big returns when the true earnings power of a business is hidden or underappreciated.
How do you assess and compare them?
At Forager, we look for opportunities that can generate a 15% return on our purchase price.
If we can find enough of those, we simply weigh up the relative risk and return of each.
Can we increase the portfolio return by adding this new stock we've found?
Or can we reduce the portfolio risk by replacing another stock with this one.
Or, best of all, can we do both?
How do you value them and manage the portfolio from a risk perspective?
The value of a business is the value, in today's dollars, of the cash it is going to generate over its life. We have a tool kit for estimating these cashflows, including looking at a company's assets, its earnings or strategic value as a takeover candidate. If we can estimate the cash flows, we can value it.
For long-term investors like us, risk is the likelihood that our valuation of the business is too high. We don't care about share price volatility but we do care about certainty. The less certainty there is about the future cashflows, the more risk there is in the investment.
What are you buying right now, particularly in light of the US election result?
The US election hasn't made much difference to our buy list.
I think Republican control of all three branches of government is going to be very good for the US financial sector.
And the US banks were cheap to start with. But share prices are already up a long way, so we don't think the opportunity is particularly attractive right now.
Our biggest successes over the past 18 months have been in Europe, particularly small European growth companies. For example, we bought an Italian company called El.En back in January.
The company makes medical lasers for tattoo removal and the like. It's a wonderful business, has been growing for a long time and is almost certain to grow further over the next decade.
It was trading at a depressed price because it is listed in Italy and no one wanted to own Italian stocks at the time we bought, but the company generates 81% of its revenue outside that country.
The Forager International Fund has done very well out of that stock already and we are finding more of these types of opportunities across the continent. So that's the most attractive part of the world for us at the moment.