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Netwealth portfolio construction series - Successful value investing in small and mid-cap stocks

During our March webinar Steve Johnson, Chief Investment Officer at Forager Funds Management, shares his views on how to successfully invest in small and medium sized companies, including developing a winning investors mindset.

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Netwealth portfolio construction series - Successful value investing in small and mid-cap stocks

  1. 1. Successful value investing in small and mid-cap stocks Presented by Steve Johnson Chief Investment Officer Forager Funds Management 16 March 2017
  2. 2. | netwealth This webinar is being recorded. • Slides will be sent to you after the webinar Enter your questions in the chat. • We will get to them at the end of the webinar Posting to social? • Make sure to use #netwealthinvest or tweet @netwealthInvest 2 Housekeeping Webinar Series
  3. 3. | netwealth3 This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth),ABN 85 090 569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of any individual.The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular circumstances.The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information. Disclaimer Webinar Series
  4. 4. | netwealth Webinar Series4 Steve Johnson Chief Investment Officer Forager Funds Management Meet today’s speaker
  5. 5. Netwealth Webinar 16 March 2017 Important information General advice only Forager Funds Management provides general information to help you understand our investment approach. Any financial advice we provide has not considered your personal circumstances and may not be suitable for you. Product Disclosure Statement The Trust Company (RE Services) Limited (ABN 45 003 278 831 and AFSL No. 235150) is the Responsible Entity and the issuer of the Forager Australian Shares Fund (ARSN No. 139 641 491). Fundhost Limited (ABN 69 092 517 087 and AFSL No. 233045) is the Responsible Entity and the issuer of the Forager International Shares Fund (ARSN No. 161 843 778). Before investing you should read the relevant Product Disclosure Statement and seek advice from investment and taxation professionals to determine if the product is appropriate for your needs. Performance Past performance is not a reliable indicator of future performance. The Trust Company (RE Services), Fundhost and Forager Funds Management do not guarantee investment performance or distributions, and the value of your investment may rise or fall. Total returns and estimated valuations have been calculated using the mid-point of unit prices, before taxation, after ongoing fees, and assuming reinvestment of distributions. We encourage you to think of investing as a long-term pursuit. Disclaimer To the extent permitted by law, The Trust Company (RE Services), Fundhost and Forager Funds Management, their officers, employees, consultants, advisers and authorised representatives, are not liable for any loss or damage arising as a result of any reliance placed on this document. Information has been obtained from sources believed to be reliable, but we do not represent it is accurate or complete, and it should not be relied upon as such. 5
  6. 6. Netwealth Webinar 16 March 2017 6 Introduction: Our Business Steve Johnson Founder and Chief Investment Officer Forager Funds Management
  7. 7. Netwealth Webinar 16 March 2017 7 Finding opportunity in unlikely places
  8. 8. Netwealth Webinar 16 March 2017 8 Finding opportunity in unlikely places FISF Forager International Shares Fund FASF Forager Australian Shares Fund Size $122.3m $152.6m Structure Open, Unit Trust Closed, ASX Listed “FOR” Performance 1 year 25.36% 24.39% 2 year 14.33% – 3 year (p.a.) 11.18% 15.06% 5 year (p.a.) – 21.49% Since inception (p.a.)* 17.61% 14.83% Inception date 8 February 2013 30 October 2009 As at 28 February 2016, after fees and fund expenses. *Past performance is not a reliable indicator of future performance. The Trust Co (RE Services) Limited, Fundhost Limited and Forager Funds Management do not guarantee investment performance or distributions, and the value of your investment may rise or fall.
  9. 9. Netwealth Webinar 16 March 2017 Today Buying small and mid-cap stocks: basic concepts of value investing 9 Pitfalls to avoid when investing A value investor's mindset Growth vs value: looking beyond trends Opportunity to ask Steve questions
  10. 10. Netwealth Webinar 16 March 2017 10 Buying small and mid-cap stocks: basic concepts of value investing
  11. 11. Netwealth Webinar 16 March 2017 Buying small and mid-cap stocks: basic concepts of value investing How much cash are you going to get? When are you going to get it? How sure are you? • Investment is most intelligent when it is most business like • Long-term focus on cashflows • The value of any security is the cumulative cashflow it returns to its owner, discounted to today 11
  12. 12. Netwealth Webinar 16 March 2017 We are willing to invest in (and attracted to) opportunities where the narrative is unappealing Focus on Forager’s own competitive advantage as investors • Under-researched • Unloved • Unique insight • Identify the advantages you have and apply those Risk Management • Avoiding bankruptcy • Disciplined approach to portfolio management 12 Buying small and mid-cap stocks: basic concepts of value investing
  13. 13. Netwealth Webinar 16 March 2017 13 Pitfalls to avoid when investing
  14. 14. Netwealth Webinar 16 March 2017 Pitfalls to avoid when investing Typical small cap investors 14 Suckers for the narrative fallacy Liquidity issues • Impact cost very high • In some cases compete illiquidity • Long time investment horizonOverly optimistic growth projections Failure to understand broader market limitations. Is it physically possible for this business to grow as much as you think? Failure to understand competitive response. If high returns being earned, what stops the competition? Failure to appreciate cultural differences in international markets Too close to management
  15. 15. Netwealth Webinar 16 March 2017 Pitfalls to avoid when investing Typical small cap value investors 15 Over reliance on published asset backing Under appreciation of costs of value realisation Over reliance on low earnings multiples “It is hard to pay a low enough price for a business in decline” – Charlie Munger International stocks • FX • Cultural differences with regards value realisation Focusing on what is in the company, rather than what is coming out
  16. 16. Netwealth Webinar 16 March 2017 16 A value investor’s mindset
  17. 17. Netwealth Webinar 16 March 2017 A value investor's mindset Successful value investing requires a very particular mindset Do you feel anxious when share prices fall? Do your emotions cloud your ability to make rational decisions? Do you struggle to think of a realistic downside when buying a stock? Do you have the basic skills to understand a business and its financial statements? A low-cost index fund or sensibly constructed portfolio of blue chip stocks will generate perfectly adequate returns over the long term 17
  18. 18. Netwealth Webinar 16 March 2017 18 Growth vs value: looking beyond trends
  19. 19. Netwealth Webinar 16 March 2017 Growth vs value: looking beyond trends Stock Weighting Ticker Description Reckon 8.0% RKN Accounting software for retail and practice management Service Stream 7.3% SSM Telecommunications and utilities infrastructure contractor Macmahon 5.7% MAH Mining contracting Cardno 5.7% CDD Engineering services NZME 5.0% NZM Print and radio media in NZ As at 31 December 2016 19 Largest 5 Holdings – Australian Fund
  20. 20. Netwealth Webinar 16 March 2017 Growth vs value: looking beyond trends • Telco and utilities contractor recapitalised in 2013 • 7 consecutive halves of revenue and profit growth • Locked in revenue growth in FY17 and FY18 • Excellent cash flow generation (2x old market cap in past 24 months) • Tax-friendly capital returns • Ugly duckling of the accounting software space (roughly one tenth the market cap of MYOB and Xero) • Well behind the curve with its cloud-based solution • Shareholder angst over cash investment BUT • Corp business probably worth the current market cap itself • Established user base is a huge asset • Targeting an interesting niche with Reckon One. We reckon 20% conversion rate makes for a very cheap business • Mining contractor emerging from near death experience • $55m cash and no debt versus $180m market cap • Several long-term contracts with profitable gold miners in Australia and Indonesia • New board and management team • Significant scope for growth and shareholder returns • Industry consolidation a necessity 20 Australian Fund Idea Summaries
  21. 21. Netwealth Webinar 16 March 2017 Stock Weighting Ticker Description Lotto24 7.5% LO24 GR Online retailer of state lottery tickets El.En 5.9% ELN IM Global leader in surgical and aesthetic laser equipment JRP Group 4.5% JRP LN UK provider of medically underwritten annuities Halliburton 3.9% HAL US Oil services Alphabet 3.9% GOOG US Online advertising, cloud storage and autonomous cars As at 31 December 2016 21 Growth vs value: looking beyond trends Largest 5 Holdings – International Fund
  22. 22. Netwealth Webinar 16 March 2017 • Germany’s largest independent retailer of lottery tickets • Represents roughly one third of lottery tickets sold online in Germany • Online growing and Lotto24’s share of market growing too • Marketing costs clouding underlying profitability of business • Share price has tripled in the past few years, no longer a screaming bargain • Global leader in medical and aesthetic laser equipment • Premium brand, high R&D and superior products • Growing market and growing market share • Paid dividends, low PE ratio and a decade of consistent growth • The only reason this business was so cheap was that it was listed in Italy • UK’s largest independent provider of annuities, specialising in medically underwritten • Huge regulatory changes. Some negative, some positive • Bought at half embedded value, still trading at a hefty discount • Growth is capital intensive, mature business will be a cash generation machine • This business can generate above average returns on capital for a long time to come 22 Growth vs value: looking beyond trends International Fund Idea Summaries
  23. 23. Questions and answers
  24. 24. | netwealth24 This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth),ABN 85 090 569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of any individual.The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular circumstances.The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information. Disclaimer Thank you Webinar Series

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