At the start of 2019, I selected a A recession proof, property proof ASX portfolio for Livewire. An equal weighted investment in the 12 stocks would have returned 28.6% for the year, some 5.6% more than the total return of the ASX 200.

Source: ASX website

Reading that is going to hurt for Forager’s clients. The Forager Australian Shares Fund returned just 3% for the year. It hurts me to read it too. Assembling the blue chip portfolio took about a day’s work.

Admittedly, 20 years’ experience helps. All of them are familiar. But we spent 2019 working long hours to identify new ideas, learning about new businesses and extracting value from those companies we already own. It irks me to think we could have had a much better year with just one day’s work. Imagine how much I could have improved my marathon running.

Apart from the obvious - everything is easy in hindsight - the question is whether there is anything to learn from the year? The answer, I think, is yes.

Obvious is not always wrong

Forager’s motto is “opportunity in unlikely places”. It’s an approach that has served us well over the past decade. Despite the last two years of poor performance, our clients are still well ahead of the index since our Australian Fund’s inception in 2009. That’s thanks to countercyclical, contrarian investment ideas like Jumbo Interactive and Service Stream.

Our International Fund had a stellar end to the year thanks to outsized exposure to the United Kingdom, a market most fund managers considered “uninvestable” a few months ago.

If you want to generate returns better than the crowd, you need to be different. That much is obvious.

The crowd is often right

The lesson of 2019, though, is that you don’t always need to be different. You don’t always need to be doing better than the crowd.

I didn’t write that article because I suddenly felt like writing about blue chips. I wrote it because I thought the Australian economy was struggling, house prices were weak and most of the beaten up stocks were structurally challenged. Interest rates were likely to be cut and big, defensive, seemingly expensive stocks were likely to be the best performers. There are times - and 2019 was one of them - when you should be targeting average and patiently waiting for the right time to make your contrarian moves.

“Channel your inner Braveheart and hold tight on your defences. Don’t be suckered into the structurally challenged. If they are struggling in this economy, how are they going to fare in a recession? And don’t be fooled by low multiples on cyclical businesses. I learned this lesson the hard way: you make money on cyclical businesses by paying high multiples of low earnings, not the other way around.”

To the bigger question then. The one my clients are no doubt asking. Why didn’t I act on my own advice?

Because it’s hard.

There’s nothing structural that makes it hard. Our funds have deliberately wide mandates. In the Australian Fund, for example, we can own any ASX-listed company and hold as much cash as we want.

The contrarian wants to be contrarian

The main problem was that we are known for being different.

We are known for being contrarian. We are known for investing where others fear to tread. My own psychological makeup and a general lack of emotion is what allows us to invest in this way. It has been successful.

To turn to our loyal client base and say “you know how we look for opportunity in unlikely places?”. Well, we just bought BHP. As much rationale as I had for it at the time, that doesn’t sit well with how we view ourselves or what our clients have come to expect. And that’s what makes it so hard.

The contrarian’s time will come again. A number of those value stocks we have been working on made good progress in 2019. The share prices have mostly gone backwards. Money continues to flood into passive funds, creating less and less interest in those stocks not in an index. And the returns at the big end of the market have mostly come from multiple expansion rather than earnings growth. That’s unlikely to be repeated.

As we roll into 2020, I’m feeling quite optimistic about the opportunities in our portfolio and under investigation. But it doesn’t change the lesson of the past year.

Sometimes simple is best.



A. Ozaydin

Being a contrarian at turning points matters a lot. But being a contrarian for the sake of being contrarian? I.e. Taking a contrarian approach to AMP after it crashed from $28.8 down to $12 in 1998 would have locked you in a decades long trap, all the way to late 2019 where it truly bottomed.

Bobby Axelrod

Good assessment Steve. Markets are unpredictable. There is a 'bullish' feeling for 2020, however we need to be prepared for a 30% - 40% correction. All you can do is prepare the ship for such rough waters.

Paul T P

"the returns at the big end of the market have mostly come from multiple expansion rather than earnings growth. That’s unlikely to be repeated" Bingo! Steve... that's why we pay you to be our (value) conscience, the BHP's and the CSL's we can do on our own... what we can't do is what you (& team) do best... think in a way that we do not naturally... and yes, hindsight is 20/20 for everyone - it's (strategic) foresight that matters. I rely on my allocation to FOR to offset the movement of the 'bleedingly obvious' should a profound shakeout occur, or 'simply', if the top end of town runs out of steam. And oh yes, the International fund does that in a similar way versus the index ETF approach. Cheers.

Marian Nguyen

Very humble Steven. Your firm is very well respected and average return is sitting high there. Great article again. Thank you. Agree with Scott Andrew completely.

Steve Johnson

Thanks Paul, Scott and Marian, appreciate the support.

SR V

"To turn to our loyal client base and say “you know how we look for opportunity in unlikely places?”. Well, we just bought BHP. As much rationale as I had for it at the time, that doesn’t sit well with how we view ourselves or what our clients have come to expect. And that’s what makes it so hard." Indeed Steve, but I'm sure they would prefer that to significantly underperforming benchmarks for extended periods. Some of those names e.g. CSL can fit any good, well diversified portfolio.

Charles Dalziell

And to make matters worse there wasn't a recession nor a property correction (well a proper one anyway). In my experience most contrarian investors are keen runners. That would make an interesting study.

peter calo

If you add a platform stock or two, e,g REA or Car sales, this would make a very reasonable ten year portfolio of Australian stocks. Of course one would need to have some money invested overseas as well,