K2 protecting capital amid market volatility

Transcription of Finance News Network Interview with K2 Asset Management Holdings Limited (ASX:KAM) Head of Australian Strategies, David Poppenbeek

Lelde Smits: K2 Asset Management Holdings Limited (ASX:KAM) is an Australian based equity fund manager. The company has four investment funds focused on Australian, Asian and International equities markets. I’m Lelde Smits and joining me at ASX Investor Series in Melbourne is the Company’s Head of Australian Strategy, David Poppenbeek. David welcome.

David Poppenbeek: Thank you for having me.

Lelde Smits: What are your funds under management and what differentiates you from other funds on the market?

David Poppenbeek:   At present our funds under management are in excess of $800 million. There’re probably three key things that differentiate us from our peers. The first thing is that we are an index unaware fund. What that effectively means is that we don’t buy the biggest company, because we don’t believe that biggest means best. What we try to do is make sure that we buy the best companies at the best prices.

The second thing that we do differently to most of our peers is that we have the ability to adjust our net exposure. Now what that effectively means is that if we don’t like the way equity markets look, we can actually sell and go to cash. And in that way we can preserve capital. The third thing that we do differently to most of our peers is that we can actually short sell. Now what that means is that if we believe that a share price is actually going to fall, we can sell in advance and buy the stock back once the share price has fallen, and create a profit. Now that’s quite a hard thing to do, but we have the ability to do that.

All of those three differentiations mean that we have more levers to pull and hence, gives us the ability to actually invest capital a little bit more wisely than most of our peers. And that kind of comes through in our results. Our results today and after 15 years, our two key funds being our Australian Fund and our Asian Fund, have compounded in excess of 10 per cent per annum, well above market benchmarks.

Lelde Smits: If we can look at performance now. How have your funds performed over the past quarter and year, and which was the standout performer?

David Poppenbeek: Over the last quarter, of our four main funds, the average performance for the quarter was up 6.2 per cent. Over the last 12 months and that’s the 12 months to September, on average our four funds have delivered 9.5 per cent. The standout performer for us has really been the Global High Alpha Fund. That Fund’s coming up to its five year anniversary and it’s compounded 24 per cent after fees, for investors. And that’s more than double what the market’s done.

Lelde Smits: What are K2’s main priorities in the near term and which sectors do you believe present the best opportunities?

David Poppenbeek: Near term our priorities are always the same, that’s to keep winning the trust of our clients. And that means that we’ve got a responsibility to make sure that we invest their capital, in a most effective manner. So we’ve got to make sure that when we buy a company, we’re buying it at the right price, understanding the growth opportunities, but also appreciating the risk. So it’s very important that we actually redeploy our clients’ capital in the most effective manner, and that way we can win their trust.

The things that look attractive probably in the Australian market at the moment, the most attractive sector we believe, are diversified financials. Not the banks, but the non-banks and these are companies like Macquarie Group Limited (ASX:MQG) because of its large global space. We also like stocks like Perpetual Limited (ASX:PPT), we like AMP Limited (ASX:AMP), we like Challenger Group Limited (ASX:CGF) and we also like Suncorp Group Limited (ASX:SUN).

Lelde Smits: After a strong start to the year, global equity markets have fallen into the second half. What movements do you forecast from here?

David Poppenbeek: We’re quite optimistic about equity markets, particularly in Australia. We think that conditions are right for equity markets to do well. And the main conditions are that we think we are in a low inflationary environment, for quite some time. We’re also a considerable way past the epicentre of the GFC, so we’re now in excess of seven years past the worst of the GFC. So what we think is that people can start to think about the future, and invest for the future.

So what we anticipate is that at present, if we look at Australian equities, the Australian equity market actually offers investors close to the highest dividend yield in the world. And when we also look at corporate balance sheets; we think that Australian shares are very under geared. One of the things that Australian Listed Companies did was they raised a lot of equity and retired a lot of debt, through the GFC. So balance sheets look fantastic. And then when we look at valuations, when we look at the Aussie market, the average PE of the Aussie market is actually below its long run average. So we’re pretty pleased with that.

Lelde Smits: If we can look closer at Australia, Australian interest rates are at record lows, but the Australian benchmark index has just erased all of its gains for the year. How is K2 looking to take advantage of this environment?

David Poppenbeek: We think looking forward, that interest rates probably are going to stay lower for longer. We think that inflation is really going to be quite controlled over the coming few years, particularly most developed economies. And what that means is that equity markets should be actually able to perform quite well. We’re relatively optimistic about equities. And what we think is going to play out over the course of the journey, is that austerity will start to fade. We think that confidence will start to grow and we think that companies will start to invest for the future, because they are actually seeing more activity from their customers.

What that ultimately will mean is that profit growth will start to develop, it’ll be slow but it will develop. And what we’re finding at present is that entry prices for shares are quite attractive. So when we think to the future, we think that we’re being compensated well with our entry prices and we think that there’re reasonable gains ahead.

Lelde Smits: David Poppenbeek, thank you for the update from K2 Asset Management Holdings.

David Poppenbeek: Thank you.


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