Lonsec downgrade, page-2

Forager’s Steve Johnson ‘dumbfounded’ by Lonsec downgrade

Forager Funds Management’s Steve Johnson has been left “dumbfounded” after influential investment researcher Lonsec slapped the firm’s global equities fund with a “redeem” rating over concern about the fund manager’s workload.

The move comes after Forager’s chief investment officer took on the extra responsibility of chief executive following the departure of Jeff Weeden. Lonsec said that although it had “solid regard” for Mr Johnson, “it had concerns regarding his workload given his expanded responsibilities”.

The downgrade means that the $194 million Forager International Shares fund will no longer be open to new investment on the Macquarie Wrap platform. And while existing investors can keep their money in the fund, they are unable to invest more. Lonsec’s rating applies for at least six months. Forager manages $345 million.

“I have never heard of this happening to someone like us when the investment team is stable,” Mr Johnson said in an interview with The Australian Financial Review.

“I’m sitting here scratching my head because it’s not a brand-new fund; we have been around for years. Forager is not a subscale funds management business. I’m dumbfounded as to how they have reached that conclusion.”

Mr Johnson said although the move was a shock, the small number of financial planners that used the product “remain supportive and our direct clients which are 97 per cent of our business don’t use or care about Lonsec ratings”.

“I am spending exactly the amount of time on the research as I always have,” Mr Johnson said. “It’s not a complicated business, and we have an experienced team on the international fund.

“I have a philosophical viewpoint that a small team running a small amount of money can dramatically outperform a larger team with a large amount of money.”

Lonsec wrote that it considered Forager’s investment team of three to be “undersized to cover the vast global equities universe and to effectively implement the rigorous ‘bottom-up’ investment process”. It also cited concerns that cost cuts would impede the fund’s growth and limit further resourcing of the team.

“Lonsec highlights that while the flexibility inherent in the manager’s approach should offer an attractive mix of downside protection in addition to the potential to perform well in cyclical upswings, results have been mixed. Lonsec considers the fund’s total fee load to be expensive.”

While Lonsec’s rating was a shock to Forager, the firm was sent a draft report before the decision, which also cited performance-related issues, style drift, as well as fee levels. The concerns were challenged by the fund manager and were subsequently scrapped in the final published report.

Mr Johnson said his message to the team was to “get on to making money” and show Lonsec “how silly this recommendation was”. Although the CIO admitted that the fund’s performance had suffered from its allocation to small-cap stocks as central banks tightened to tame inflation, the changing macro environment made it ripe for “stock pickers”.

Over one year, the fund’s total return after fees was minus 2.4 per cent. Over three years it has returned 15.4 per cent, and over 10 years 11.8 per cent.

“I have built this business from scratch and juggled competing responsibilities my whole life and have been through many financial crises for the last 20 years,” Mr Johnson said.

“The business has never been in a better place... my fund managers are doing a really good job running the fund. So for Lonsec to slap a ‘redeem’ rating is extremely frustrating.”