Forager Australian Share Fund (FOR) today launched on the ASX, with a market cap of around $140m and $160m invested by Forager in the overall strategy, becoming the 5th Listed Investment Company (it’s actually a Listed Investment Trust, but more on this later) to list on the ASX for 2016. This listing is a little different to usual, with the fund converting from a regular managed fund to a listed investment, rather than the typical LIC listing where capital is raised for a new investment vehicle.
The Intelligent Investor Value Fund as it was known then was born in 2009 off the back of the GFC. Led by analyst Steve Johnson, share tip subscription service Intelligent Investor launched a spinoff managed fund to subscribers of the Intelligent Investor newsletters. With a large subscriber base, Intelligent Investor was unable to cover smaller cap stocks, with their recommendations tending to move the markets as members bought and sold after their recommendations changed. Johnson launched the managed fund, promising to provide members access this end of the market (as well as large caps if value was present), and the managed fund was offered initially to newsletter members. In 2014, Intelligent Investor was sold and at that point the Forager brand was established. With consistency in performance, the fund has grown to around $150m, with its investor base made up almost entirely of retail investors (the majority of which are SMSFs). This video provides some history of the fund.
Forager also manages an International Share fund, which remains an unlisted managed fund.
As mentioned above Forager Australian Shares Fund tends to have a small cap bias, however, Forager is a deep value fund manager, and will allocate their portfolio where they see value. From this article in 2013, it can be seen the fund has at times held over 50% of its portfolio in large caps and at other times less than 20%. The fund tends to be fairly concentrated, usually holding 15-20 stocks at any one time, and can hold unlimited cash if investment opportunities do not present themselves.The fund's benchmark is the S&P/ASX All Ordinaries Accumulation Index.
Steve Johnson has stated many times that a portfolio of around $150 - $200m is the most he is prepared to manage within the Australian fund. This is a bold move in a funds management business, where the marginal cost of managing money is low (therefore incentivising the manager to continue to take in new money from investors), however Forager, believing their edge is in the Small Cap space states a larger fund will not allow them to take meaningful positions in many of the companies on their watchlist. Thus, a decision was made to close the fund to new investors.
Secondly, managed funds are open ended vehicles with investors able to buy new units and sell units (in Forager’s case on a weekly basis). By closing the fund to new investors Forager essentially closed off the ability of investors to buy new units, however this would mean the ability to sell units would still be available. As a Value investor, Forager sees most opportunities in time of market panic, however this tends to be the exact time that investors panic and redeem their investments. As a result, the decision was made to convert the fund to a closed-end listed investment. While investors will still be able to buy and sell units from each other on the ASX, the fund itself will not issue new units or redeem old ones. The fixed number of units will mean the manager can invest the way they see fit, without the need to worry about investor liquidity.
We mentioned earlier that the Forager Australian Shares Fund will launch as a Listed Investment Trust (LIT) rather than the more popular Listed Investment Company (LIC). Both funds are close ended, meaning new units cannot be issued without capital raisings or dividend reinvestment, however a LIC is a company structure meaning earnings are taxed at the company tax rate, and then franking credits are generally passed back to investors. On the other hand a LIT is a trust like a Managed Fund or ETF, meaning all earnings are passed back to investors.
This tends to mean that income returns to investors within a LIT will not be as consistent as that in a LIC. It will also mean dividends are unlikely to be 100% franked as is often the case with LICs, as the income return will include capital gains, and dividends which do not have franking credits attached. LICs are able to pass on high franked dividends due to the tax paid by the LIC itself on the profits they have made from investing.
Johnson states two reasons for listing the fund as a LIT. Firstly, it was simpler to convert the existing managed fund to a LIT, as the trust structure remained the same. Secondly, companies are not entitled to capital gains tax concessions, and as Forager generally holds their stocks for greater than 12 months, tax paying investors will be entitled to these discounts within a LIT structure.
There are a handful of LITs listed on the ASX. For simplicity in the ETF Watch Fund Database we currently refer to them all as LICs.
The fund boasts performance history of 20.37% pa over the last 5 years. The below diagram shows the performance of the fund after fees compared to the benchmark S&P/ASX All Ordinaries Accumulation Index. Note that as usual, past performance should not be seen as an indication of future expected performance.
Source: Forager Funds Management
Management fees are unique, with performance fees not tied to a benchmark but rather a performance hurdle. Fixed management fees are 1.1% pa and performance fees are charged at 10% for performance above 8% pa.
Forager have also indicated they will generally provide a daily NTA or NAV per unit to the market. Far from discouraging long term investment behaviours, they believe a daily price disclosed pre-market is the best way to provide an orderly and well informed market, for those investor wanting to buy or sell.
We’re excited to see how Forager Australian Shares Fund will go as a listed investment. Will this fund trade at a premium or discount to its Net Tangible Assets (NTA)? Will there be liquidity to buy and sell with the fund primarily held by retail investors, many of whom are Intelligent Investor members with a ‘long term’ ethos. Will the fund continue to perform well without the incentive of growing their investable assets? Time will tell but we commend Forager for doing something different and seemingly putting unit holders' best interests first. It will be interesting to see if this is the beginning of a new trend for independent managed funds or if Forager are the exception in the industry.
This post was prepared with publicly available information available from Forager Funds Management. ETF Watch did not receive payment from Forager for this post, nor endorses the merits of the fund. We recommend investors seek professional advice before investing in this fund.