Independent Investment Research has initiated coverage of the Forager Australian Shares Fund, giving it a ‘recommended plus’ rating for its ability to produce superior risk-adjusted returns consistently over a long period.

IIR says that with its focus on small caps, the fund may provide a source of diversification for investors who tend to hold large cap Australian stocks.

The Forager fund was launched in 2009 and is managed by Forager Funds Management. It was listed on the Australian Securities Exchange in December last year.

It is small cap portfolio, with a focus on turnaround stories and asset plays, often targeting what it calls “beaten-up” sectors. This gives the fund a contrarian flavour.

Usually there are 15 to 25 stocks in the portfolio and at the end of March it had no exposure to the ASX 200.

At the end of March, mining services company Macmahon Holdings was the largest position in the fund, accounting for 9.8 per cent of the portfolio.

Other substantial holdings include the accounting software and services company Reckon, New Zealand media company NZME, environmental services company Cardno and the infrastructure services company Service Stream.

The fund’s net tangible assets rose 21 per cent over the 12 months to the end of March, compared with a 19.5 per cent increase in the All Ordinaries Index.

Over the past five years the fund has produced average growth of 16.2 per cent in its NTA each year, compared with average growth of 7.6 per cent for the index.

“Forager provides the opportunity to invest in a professionally managed portfolio of small and micro-cap stocks. Given the very high conviction nature of the fund, investors must be confident in the manager’s stock-picking ability and ability to preserve capital,” IIR says.

“In this regard, the manager’s track record is strong, with a well established process proven over a market cycle.

“The small team ensures consistency of process and we believe the track record of alpha generation and superior risk-adjusted returns is repeatable.”

Forager’s chief investment officer is Steve Johnson. He joined Intelligent Investor in 2003 and managed its research business for six years. In 2009 he started the funds management business that is now Forager.

IIR says a risk is that the fund may exhibit material volatility and, given the smaller market capitalisation and relative illiquidity of some holdings, may be subject to material drawdown risk in periods of market stress.