A portfolio for all seasons


A portfolio for all seasons

Written by Steve Johnson, Chief Investment Officer, Forager Funds

What does the return of low-rise jeans, crop tops and yoga pants have in common with markets?

One thing is confidence. With unprecedented mania for cryptocurrencies and share indices trading at all-time highs, it’s safe to say investors are feeling confident about the future. The second is that, if you hang around long enough, what’s fashionable eventually becomes unfashionable.

Indeed, much like fashion trends, investment trends recur over time. Small tweaks are often made to make looks new again, but the underlying human emotions driving fear and greed cycles are the same. However, one trick to investing can be making your portfolio timeless. This means looking through the market’s short-term trends and identifying investments that can stand the test of time.

But when it comes to choosing a long-term investment (much like a timeless design), it’s not just the design you choose that counts; it’s also how you shop around and how you wear it. While I’m no professional shopper (you should’ve seen me in the 80s), there are a few things I try to keep in mind.

A little more can go a long way

I have a confession to make: for a value investor, I probably spend more money on clothes than most. That’s because lots of cheap clothes are a false economy. Buy a low-cost pair of shoes and, more often than not, the soles wear out or the laces fray and I end up paying more just to buy another pair. What I’ve learned is that while it can be great to find a bargain, it can also be worth paying a little more upfront for a good pair of leather shoes that offers both quality and longevity.

US logistics solutions company Zebra Technologies is a good example of this. You might not be familiar with Zebra but, if you look closely the next time you’re in Bunnings or Dan Murphy’s, you’ll likely see its name on the barcode-scanning equipment. The company’s solutions support inventory management for most of the world’s best retailers. As click-and-collect, online shopping and home delivery services proliferate, Zebra’s offering will become more important. We’ve owned Zebra for three years and go to sleep every night knowing it will be in demand – regardless of the season. In fact, I’d liken this stock to a classic white-collared shirt; it’s not going out of fashion anytime soon.

Dress for the season you’re in

But while it’s good to keep some classics on hand, there will be times when you’ll want to wear something seasonal. For example, if summer is coming up, you might want some swimming trunks.

For the Forager International Shares Fund, this has meant a collection of smaller investments in the commodities space. We’ve been worried about inflation taking hold, and are contemplating another commodity super-cycle similar to that of 2003–2007 due to chronic under-investment in the sector. Without betting a large portion of our portfolio on something inherently uncertain, it’s a good time for us to adapt to changing conditions and gain exposure to a sector we’re not always invested in.

Buy a bargain before it’s cool

We all love a bargain and finding unique items that make our “wardrobes” stand out. But it goes without saying that if you are going to focus on market trends, being early is important. So, too, is shopping around for items that might be out of fashion now but could be popular later.

US-listed Celsius Holdings, a business that makes energy beverages for fitness fanatics, is now an extremely hot stock. Despite making less than US$200 million in sales this year, the company has been valued at more than US$7 billion by enthusiastic investors. While there were several red flags on Celsius when we bought it, it was also trading at one-twentieth of the price we’re seeing today.

We previously sold that stock too early (another lesson in making sure you let trends run their course), but it goes to show how profitable it can be when something that was unpopular starts to gain a following. However, market volatility can take its toll on businesses like these and that’s been a plus for us recently; we’ve been able to reinvest in Celsius for the third time in two years.

There’s a time and place

For all this talk of changing market trends, the bulk of Forager’s portfolios (roughly 80%) are stocks that stand the test of time. We generally want to own businesses that make profits and generate returns over the long term, and the less they’re dependent on the external environment, the better.

With that said, there’s nothing wrong with some diversity in your investment portfolio. In fact, some attractively priced exposure to market trends that might become popular can prove extremely profitable. But it’s important to recognise that being on trend can be a risky proposition, and that it’s often far easier to stick with a timeless option instead.

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