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Should you buy this top performing small-cap fund manager?

Before answering the question in the heading above, it must be said first that it’s easy for any investor to say that they’ll buy low and sell high.

But this is perhaps much harder to do in practice.

Thinking in terms of share price movements, the past always appears in 20/20 vision, but looking ahead the future is uncertain and foggy, especially over time-frames of 12-36 months or less.

For this reason, I seriously question whether most individual investors can successfully research and choose stocks over shorter time periods consistently, especially if most of us are busy working in a day job or running a business.

Twelve months ago was an opportune time to buy Bradken Limited (ASX: BKN), Silver Lake Resources Limited. (ASXL SLR), or South32 Ltd (ASX: S32), but how many of you knew that then?

The respective returns were 578%, 224% and 154%, a spectacular outcome.

Likewise, who out there was smart enough to have held and then sold (or shorted) 1-Page Ltd (ASX: 1PG), Surfstitch Group Ltd (ASX: SRF), Slater & Gordon Limited (ASX: SGH) or iCar Asia Ltd (ASX: ICQ)?

In doing so, you would have saved a lot of grief for your portfolio, as these stocks have been annihilated in the last 12 months with ‘returns’ of -92%, -90%, -74% and -72% respectively.

Generally speaking, I think that buying the shares of smaller companies with the view to selling in periods of up to three years (a speculative activity) can be extremely dangerous for the retail investor.

The common, and better, investing strategy for most investors is the one espoused by the Fool. And one that, incidentally, I follow quite closely.

That is, attempt to buy the shares of quality companies at a reasonable price (it doesn’t have to be dirt cheap), and then hold for periods much greater than one year; preferably 5 or 10 years instead.

Allocate the ‘market timing’ part of your portfolio to the professionals

To answer the question in this article’s heading: the answer is yes and here’s why.

There’s nothing wrong with ‘speculating’ for a small proportion of your portfolio, if it’s done sensibly, and especially so with professional management doing it for you.

Enter Steve Johnson and his team from Forager Funds Management.

Last week, Forager finalised the conversion of its Australian share fund to a listed investment trust, Forager AU FPO (ASX: FOR).

As Sean O’Neill wrote last Friday, Forager buys shares that are trading at a significant discount to their estimate of ‘intrinsic’ value, and then waits for the market to recognise the value. This would then increase the value of the fund’s purchase in the process before they sell their position.

Now, like many here following, I’m an investor in stocks at heart, but that doesn’t mean I won’t look to particular fund managers who have a unique investing strategy … a strategy that I simply can’t replicate at home.

You see, Forager will invest in most stocks that can be described as unloved, out-of-favour and cheap, many I wouldn’t touch with the proverbial barge pole. But this is because I simply don’t have the time to undertake in-depth research on the business to find that hidden value that Forager is so good at.

Which is why I think managers like Forager can add value in the context of a diversified portfolio.

As you may well imagine, Forager doesn’t get it right all of the time though.

For example, their investment in the RNY Property Trust (ASX: RNY) recently announced a dramatic fall in the value of its net tangible assets (NTA). An NTA of $0.55 18 months ago could be worth only $0.04 today in a worst case scenario.

However, given the Australian Shares Fund has demonstrated a good track record with returns of 20.37 percent over the last five years (to 31 October 2016), our units in the listed trust won’t be leaving our portfolio anytime soon.

Foolish takeaway

Don’t be a hero pretending to pick the highs and lows in [lower-quality] small-caps.

Do you really think you’d be able to buy 1-Page Ltd at $0.28 in July 2014, ride the wave through to $5.69 in September 2015, and then know to sell before the stock plummets to where it is now at $0.185? As I say, hindsight is very 20/20.

For most retail investors, myself included, the better approach to genuine contrarian investing is to avoid the speculation of buying and selling yourself, and leave this investment strategy to the professionals.

Buying units in the new Forager listed investment trust at or near its NTA should be a good complement to most investors’ portfolios.

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Motley Fool contributor Edward Vesely owns shares in Forager AU FPO. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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