Forager Funds Management is reducing its exposure to some of its top-performing small-cap stocks, citing concerns that the recent market rally has inflated valuations to unsustainable levels. Forager Australian Shares Fund, which manages $214.3 million, achieved a 42 per cent return in the year to September, outperforming the S&P/ASX Small Ordinaries Accumulation Index’s 21.5 per cent gain. Forager is an investment management firm based in Sydney. They focus on identifying undervalued companies and aim to deliver strong, long-term returns for their clients.
Chief Investment Officer Steve Johnson informed clients of significant portfolio adjustments made in the past month due to substantial price movements in certain holdings. The fund fully exited its position in sports tech company Catapult after a profitable run, having initially invested in June 2021 and added to its position in 2023. Additionally, Forager reduced its stake in wealth management software provider Bravura Solutions following a surge in its share price triggered by an earnings upgrade.
Despite identifying new opportunities among “fallen angels”, Forager is adopting a cautious approach, increasing its cash allocation from 8.4 per cent in August to 14.2 per cent. Johnson highlighted the need for vigilance in the current environment, particularly regarding beaten-up stocks. While considering Domino’s Pizza and Reece, Forager recently added IDP Education to its portfolio and increased its holding in payments provider Cuscal, now the fund’s largest holding. Other fund managers also acknowledge signs of market froth, especially in gold, artificial intelligence and defence stocks.
Bell Potter suggests the small-cap rally will broaden beyond the mining sector, noting that small industrials have lagged. They recommend stocks such as AMA Group, Bega Cheese and Centuria Capital, among others. QVG Capital’s Opportunities Fund is avoiding sectors like gold and AI, noting that speculative stocks have performed well recently. The fund manager believes markets are starting to get “pointy” in terms of returns, hinting that the current bull market may be getting late in the cycle.
