Ranmore Global Equity Fund’s Setback Highlights Importance of Diversification

The Ranmore Global Equity Fund, known for its consistent outperformance of the S&P 500 over the past two years, experienced a significant blow in 2024, highlighting the unpredictable nature of even the most well-researched investments. Despite its success, driven by its fund manager Sean Peche’s shrewd stock picking, excluding the “Magnificent Seven” tech giants entirely, the fund’s significant investment in the U.S.-listed Perion Network resulted in substantial losses. This event serves as a stark reminder of the ever-present risks within the investment world, even for seasoned professionals, reinforcing the paramount importance of diversification and robust risk management strategies.

Key Takeaways: A Rollercoaster Year for Ranmore

• Significant Loss on Perion Network Investment: The Ranmore fund suffered a major setback due to its investment in Perion Network, which fell nearly 75% in 2024.
• Microsoft’s Pricing Strategy Shift: A change in Microsoft’s pricing strategy for digital advertising severely impacted Perion Network’s revenue and stock price.
• Undervaluation Thesis Proven Wrong: Despite Perion’s strong cash position and apparent market share gains linked to Microsoft Bing’s integration of ChatGPT, the investment ultimately failed.
• Importance of Diversification and Risk Management: The experience underscores the significance of diversification and careful risk assessment in portfolio construction, even for seemingly strong investment opportunities.
• Strong Returns Despite Setback: Despite the Perion Network loss, Ranmore still managed impressive returns in 2023, exceeding the S&P 500.
• Opportunities Found Amidst Uncertainty: The fund identified buying opportunities in French companies after political uncertainty, demonstrating a proactive approach to market volatility.

The Perion Network Predicament: A Case Study in Unexpected Risk

Perion Network, initially perceived as an attractive investment, became the Ranmore fund’s worst-performing stock of the year. Fund manager Sean Peche described the company as “**we thought it was the Google AdWords for Bing**,” highlighting an apparent misunderstanding of the underlying risk. Perion, an Israeli company working with Microsoft’s Bing search engine, seemed positioned for growth due to Bing’s rising market share fueled by ChatGPT integration. Its substantial cash reserves, representing about a third of its market value, further bolstered the perceived stability of the investment. Peche also believed that the company might be **undervalued due to limited investor attention** given its status as a non-index Israeli company.

The Unexpected Turn of Events

However, Microsoft’s unforeseen change in its digital advertising pricing strategy turned the investment sour. Perion’s April revenue forecast plunged from $860-$880 million to $590-$610 million, a significant disappointment for a growth company. This sharp decline directly resulted from the changes implemented by Microsoft’s Bing. **”Unfortunately, Microsoft changed their pricing strategy in digital advertising and the share price fell sharply,”** Peche explained to CNBC. This risk, although highlighted by short seller Spruce Point in 2023, was evidently underestimated by the Ranmore team.

Lessons Learned: The Importance of Humility in Investing

The experience with Perion Network served as a potent lesson for the Ranmore team. Peche emphasized the inherent unpredictability of the market, stating, **”That’s why we are not high-conviction investors…You [have] a company with some smart Israeli guys with lots of cash on the balance sheet and a growing market share, etc. Things change overnight.”** The fund’s relatively high concentrated position in Perion Network (over 2% of the portfolio)—larger than suggested by their risk tolerance— highlighted a needed improvement in their portfolio allocation and risk management process. The considerable cash reserves, while initially viewed as a significant asset, proved insufficient to offset the impact of the revenue collapse.

Capitalizing on Opportunities: Navigating Market Uncertainty

Despite the setback with Perion, the Ranmore fund demonstrated its ability to identify and capitalize on opportunities in other markets. Following political uncertainty in France in late June, marked by President Macron’s unexpected snap election announcement, the fund actively sought undervalued companies. **”When [President] Macron announced the snap election, we were buying some French companies,”** Peche explained. **”There was an opportunity to acquire more because all the macro investors were going, ‘Oh, this is a disaster,’ and we were going, ‘Well, these companies are cheaper, and people are still going to the supermarkets.'”**

Carrefour: A Case Study in Value Investing

The fund specifically highlighted Carrefour, a major French food retailer, as a compelling investment during this period. Even with a 12% drop in its stock price due to election-related concerns, the Ranmore team saw long-term value. **”There was no change in Carrefour’s business model, nor its long-term outlook, and regardless of the outcome of the French election, people will still need supermarkets in France,”** Peche noted. This conviction, coupled with Carrefour’s attractive valuation (seven times earnings and a 6% dividend yield), cemented their investment decision.

Overall Performance and Future Outlook

Despite the significant loss on Perion Network, the Ranmore Global Equity Fund continues to demonstrate strong performance. The fund reported a remarkable 31% return in 2023 compared to the S&P 500’s 24% return. It also showed 1.8% total returns in 2022 when market indices were bordering on a bear market. Strong performances from other investments, such as Nippon TV (up over 50%), contributed significantly to these impressive results. Furthermore, the fund successfully navigated a period of political uncertainty, identifying attractive opportunities in the French market. The Perion situation serves as a cautionary tale, yet further underscores the strength of Ranmore’s overall investment strategy built around proactive risk management, disciplined valuation, and taking calculated risks.

While the Perion Network investment serves as an important reminder of the inherent risks in the financial markets, it also demonstrates the importance of adapting to market conditions, maintaining prudence, and diversifying across asset classes and geographical regions. The Ranmore Global Equity Fund’s overall results solidify their approach, albeit with a renewed focus on further enhancing risk management procedures given the learnings gained from the Perion investment downturn.