K2 Select International Absolute Return aims to deliver superior risk adjusted returns through the investment cycle. Our target return is 10+% p.a. over the long term. The company actively invest in equities when growth opportunities exist to generate positive returns for our clients, and aim to protect these gains when market conditions change.
The K2 Select International Fund returned -4.06% for the month outperforming the index by +0.8% in December. Markets were broadly weaker in December following strong gains from the one-year lows in October. A combination of compelling valuations combined with the prospect cash rates will not rise as high as initially anticipated by bond markets were key drivers for the risk on sentiment to help drive equity markets higher from September to early December.
Further, consistent early signs of lower inflation inputs from PMI surveys indicated that the worst of inflation is now behind us. We view 2023 as a less volatile year compared to the previous year. There appears to be more predictability with regard to monetary policy and the slowdown in economic conditions and earnings has been priced in. There will be challenges however the US labour market, households and corporates remain in reasonable condition despite the rapid rise of the Fed Funds target rate to 4.25%-4.5%. There is a degree of resilience to the world’s largest economy which will position their economy well to deal with the earnings and economic downgrades later this year. Looking through 2023 we believe current valuations remain reasonable.
A Fed Funds target rate of 5%-5.25% is our core view with a low in the earnings cycle in the September quarter. The opening up of the China economy following years of persistent lockdowns will be a net positive for global growth this year. New Investment Manager appointment: On 9 January 2023 the board of K2 Asset Management Ltd (K2) announced a partnership with GAM International Ltd (GAM) to take on the role of investment manager of the K2 Select International Absolute Return Fund. With over 35 years’ experience GAM is an active, independent global manager that is headquartered in Zurich with offices across 14 countries and collectively manage over AUD 100 billion in assets. This is an exciting opportunity, and we are pleased to be able to partner with such a large global and high-quality manager that has delivered a strong track record. Facilitating successful best-of-breed global managers for this fund ultimately benefits Australian investors.
What is K2 Select International Absolute Return K2 Select International Absolute Return is an Managed Funds investment product that is benchmarked against Developed -World Index and sits inside the Foreign Equity - Long Short Index. Think of a benchmark as a standard where investment performance can be measured. Typically, market indices like the ASX200 and market-segment stock indexes are used for this purpose. The K2 Select International Absolute Return has Assets Under Management of 15.86 M with a management fee of 1.36%, a performance fee of 0.68% and a buy/sell spread fee of 0.5%.
How has the investment product performed recently? The recent investment performance of the investment product shows that the K2 Select International Absolute Return has returned -1.46% in the last month. The previous three years have returned 1.79% annualised and 12.31% each year since inception, which is when the K2 Select International Absolute Return first started.
How is risk measured in this investment product? There are many ways that the risk of an investment product can be measured, and each measurement provides a different insight into the risk present. They can be used on their own or together to perform a risk assessment before investing, but when comparing investments, it is common to compare like for like risk measurements to determine which investment holds the most risk. Since K2 Select International Absolute Return first started, the Sharpe ratio is 0.43 with an annualised volatility of 12.31%. The maximum drawdown of the investment product in the last 12 months is -1.51% and -30.44% since inception. The maximum drawdown is defined as the high-to-low decline of an investment during a particular time period.
What is the relative performance of the investment product? Relative performance is what an asset achieves over a period of time compared to similar investments or its peers. Relative return is a measure of the asset's performance compared to the return to the other investment. The K2 Select International Absolute Return has a 12-month excess return when compared to the Foreign Equity - Long Short Index of 8.66% and -1.2% since inception.
Does the investment product produce Alpha over its Peers? Alpha is an investing term used to measure an investment's outperformance relative to a market benchmark or peer investment. Alpha describes the excess return generated when compared to peer investment. K2 Select International Absolute Return has produced Alpha over the Foreign Equity - Long Short Index of 0.83% in the last 12 months and -0.08% since inception.
What are similar investment products? For a full list of investment products in the Foreign Equity - Long Short Index category, you can click here for the Peer Investment Report.
What level of diversification will K2 Select International Absolute Return provide? K2 Select International Absolute Return has a correlation coefficient of 0.79 and a beta of 0.84 when compared to the Foreign Equity - Long Short Index. Correlation measures how similarly two investments move in relation to one another. This establishes a 'correlation coefficient', which has a value between -1.0 and +1.0. A 100% correlation between two investments means that the correlation coefficient is +1. Beta in investments measures how much the price moves relative to the broader market over a period of time. If the investment moves more than the broader market, it has a beta above 1.0. If it moves less than the broader market, then the beta is less than 1.0. Investments with a high beta tend to carry more risk but have the potential to deliver higher returns.
How do I compare the investment product with its peers? For a full quantitative report on K2 Select International Absolute Return and its peer investments, you can click here for the Peer Investment Report.
How do I compare the K2 Select International Absolute Return with the Developed -World Index? For a full quantitative report on K2 Select International Absolute Return compared to the Developed -World Index, you can click here.
Can I sort and compare the K2 Select International Absolute Return to do my own analysis? To sort and compare the K2 Select International Absolute Return financial metrics, please refer to the table above.
Has the K2 Select International Absolute Return been independently verified by SMSF Mate? This investment product is in the process of being independently verified by SMSF Mate. Once we have verified the investment product, you will be able to find more information here.
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Comments from SMSF Mates SMSF Mate does not receive commissions or kickbacks from the K2 Select International Absolute Return. All data and commentary for this fund is provided free of charge for our readers general information.
Performance Commentary - November 30, 2022 The K2 Select International Fund returned +6.86% for the month outperforming the index by 4.0% in November. The strong risk on market sentiment that began in early October continued through to month-end. There have been a number of leading indicators that have been supportive for markets which have rallied strongly from the recent lows. Peaking US bond yields combined with some lower partial inflation inputs have generally been positive for risk assets. The recent market rally needs to be put in context as performance year to date has been very volatile following the most aggressive US Fed interest rate hike cycle since the early 1980’s. Further, there will be some lagged effects impacting the economy well into next year. The tighter monetary policy has been effective. There have been clear signs of demand destruction in the US economy following the aggressive rate hike cycle combined with Quantitative Tightening (QT).
Earnings have been downgraded over the year in line with lower growth pulse. Despite the earning pressure some sectors have performed well. This includes energy, financials and industrials. For the year ahead it is anticipated that the pace of aggregate earnings downgrades will slow. Looking forward, signs of economic slowdown will continue to be viewed as positive news for markets as this suggests cash rate reaching their peak for the cycle. The Fed commentary however will remain hawkish. This will be at odds with softening signs of economic activity. The Fed simply needs to be convinced the inflation threat is addressed. Despite their commentary bond markets are beginning to price in a 5.25%-5.5% Fed Funds Rate and the long bond yields are already starting to fall from their highs earlier this year. The cure inversion is currently suggesting that the tough Fed narrative of further rate hikes may not eventuate. The slow opening of the economy in China will be a key contribution for global growth in 2023.
The best form of stimulus is simply allowing economies to reopen. This should lead to the long repair in the very weak consumer and business sentiment in China following such aggressive lock down polices. In Europe, the economic challenges remain amplified. The portfolio cash position is 3% at month-end compared to 15% in the June quarter. We continue maintain underweights to emerging markets and the EU region. Some of the best performing holdings for the Fund in November include BHP, Rio, Judo Capital, Macquarie and Glencore.
Performance Commentary - October 31, 2022 The K2 Select International Fund returned +3.56% for the month.
Some risk appetite began to re surface in October from global investors. However, it has been undeniably a volatile year to date as markets have continued to adjust to the persistent robust pace of tighter monetary policy. The recent US quarterly reporting period illustrated that US earnings have been resilient but slowing. Further, various partial economic indicators have clearly exhibited a slower economic pulse compared to the previous quarter and earlier this year when the US economy was growing at a rapid pace following two years of stimulus. The notable spike in inflation data over the past year has reinforced the dilemma central banks face. The momentum of Fed Rate hikes has been the quickest in over a generation.
The current US rate hike pace is well ahead of the comparable inflation risk periods of 1994 and 1983, which reinforces the inflation concern from the Fed Chair Powell. The jumbo 0.75% rate increases have continued this year taking the Fed Funds Rate to 3.25% (upper band) from near zero earlier this year. In the early Nov Fed Meeting rates are expected to move another 0.75% to take the effective Fed Funds Rate to 4%. We view that a 4.75%-5% Fed Funds Rate would be an appropriate pause level and this would be positive for markets. Combined with the Quantitative Tightening (QT) the Fed has engineered a very aggressive restrictive monetary policy to address inflation. The demand destruction in the most robust global economy has started to show. At the margin, this adds some more predictability that we may be approaching a pause in rate hikes soon.
This should lead to the USD strength pausing which will be a relief for many emerging economies. The portfolio cash position is 4% at month-end compared to 15% in the June quarter. We continue maintain underweights to emerging markets and the EU region. Some of the best performing holdings for the Fund in October include Stanmore Resources, Netflix, Macquarie and Kina Securities.
Performance Commentary - September 30, 2022 The K2 Select International Fund returned -8.79% for the month in another volatile month. Global equity markets have had a difficult year.
Markets remain volatile and the uncertainty persists. The US Fed increased the Fed Funds rate by a further 75 basis points at the FOMC Meeting in late September. This now takes the rate to a restrictive 3%-3.25% target (lower and upper band). Interestingly the pace of US rate hikes in the current cycle have now increased at a faster pace compared to the previous aggressive rate hike periods of 1994 (Greenspan) and 1983 (Volker) periods. The commentary from the Fed Chair have continued to reinforce their hawkish comments. This remains a challenge for investor sentiment. The pace of the slowdown year-to-date to address inflation risks has been painful and felt by the market performance including defensive asset classes such as fixed income. In addition to the US interest rate hike, restrictive quantitative tightening (QT) is also underway effectively slowing credit growth and contracting the money supply.
Further, the strength of the USD this year vs all currencies assists the Fed as a strengthening currency is less inflationary for the economy. However, the strength of the USD has acted as a wrecking ball delivering plenty of economic pain for many economies, including emerging economies with USD liabilities. Inflation risks look set to persist despite the view that peak inflation is behind us Getting core inflation back towards the 2%-3% targets in many western economies remains a challenge. Pricing in rate cuts remains pre-mature and the record low ”near zero” rate settings of the recent past will not return anytime soon.
Despite the many challenges, there are some positives that indicate the economy can absorb the painful monetary setting although some sectors and households will be impacted more than others. Aggregate corporate earnings and credit conditions remain positive, household savings remain high (but falling) and the labour market remains robust. The outlook will however remain uncertain. Hence valuations remain compelling. The portfolio cash position is lower at around 2% at month-end compared to 15% last quarter. Some of the best performing holdings for the Fund in the September quarter include Netflix, Summerset, Stanmore Resources, Cohen & Steers and US Bancorp.
Performance Commentary - August 31, 2022 The K2 Select International Fund returned -2.2% for the month. Financial markets continue to exhibit ongoing volatility due in part to some uncertainty with monetary policy settings going forward.
The direction of interest rate settings and the ongoing quantitative tightening (QT) in the US has some obvious implications for valuations and investor sentiment. Markets are always searching for additional clarity. The commentary and guidance from the Federal Reserve needs to be reconciled with the underlying economic data to better understand future policy settings and risks. As inflation pressures persist, market expectations are for the Fed to raise rates by a further 75 basis points at the upcoming FOMC Meeting in late September. This will take the Fed Funds Rate to restrictive range at 3.25% (upper bound target) from the current 2.5%. While it is reasonable to suggest that peak inflation is behind us, getting core inflation back towards the 2%-3% targets in many western economies looks some way off. Inflation may be falling in the year ahead however it looks likely it will remain elevated compared to long run averages. This suggests that cash rates will be restrictive for a short period ahead and investors will need to be comfortable that markets will not see sub 2% cash rates anytime soon.
The ultra-low near zero rate settings of the recent past will be viewed going forward as sub-optimal policy with the benefit of hindsight. Despite the higher rate outlook, aggregate corporate earnings and credit conditions remain positive (but slowing), household savings remain high (however falling from cycle highs) and the labour market remains strong. The uncertainty remains going forward however we anticipate cash rates to peak by year-end. This should be supportive for the economy and earnings outlook. Further, valuations remain compelling and are set to remain so until there is further clarity on the interest rate front. The K2 Select International Fund continues to have a USD exposure currency hedge in place which will benefit from a rising AUD. The portfolio cash position is lower at 6.3% at month-end compared to 15% a month earlier as we take advantage of compelling valuations in August to reinvest additional cash. Some of the best performing holdings for the Fund this month were PeopleIn, Macquarie Group, News Corp, Ryman Health and Netflix
Performance Commentary - July 31, 2022 The K2 Select International Fund returned +5.0% for the month. The market recovery was a function of a number of different factors. The additional confirmation of good US earnings, reasonable underlying economic conditions combined with cheap valuations, all helped improve investor sentiment. Looking forward, there will continue to be some ongoing uncertainty with regard to the pace of tighter monetary policy. The monthly flow of economic data will help markets build a better picture of the economic and therefore earnings momentum. Despite the tighter monetary policy by developed market central banks globally, the pace of earnings growth and the tight labour market remain robust.
They do not exhibit recessionary levels as some other indicators suggest. The ongoing uncertainty for markets regarding the pace of US rate hikes will remain as markets look for some confirmation on lower inflation expectations. It would be reasonable to conclude that we are close to peak inflation. This is a positive for market sentiment going forward. The pace of rate hikes from the US Fed has been robust year to date as they have signalled to the market the need to address inflation expectations and slow down the robust momentum of the US economy. The Fed Funds rate is anticipated to approach 3.5% by year-end and each Fed Fund move will be data dependent. The Fed is no longer behind the curve and price stability is their primary focus. There are a number of underlying positives. Credit conditions, corporate balance sheets, tight labour market, lower energy prices and household savings in the key developed economies remain in good aggregate condition. This was confirmed with some recent economic data and quarterly earnings. Some key risks are the elevated geo-political concerns between China and the west, uncertainty of peak inflation, ongoing supply chain disruptions and corporate costs.
The K2 Select International Fund continues to have a USD exposure currency hedge in place which will benefit from a rising AUD. We view the peak USD strength in the June quarter is the peak in the cycle. The portfolio cash position was 15% reflecting a cautiously optimistic outlook. Some of our largest weightings include Microsoft, VISA, Macquarie, Rio, Toronto Dominion Bank and JP Morgan. Some of the best performing holdings for the Fund this month were MA Financial, Microsoft, Macquarie, VISA, Summerset Group and Netflix
Performance Commentary - June 30, 2022 In a volatile global equity market in June, the K2 Select International Fund returned -11.91% for the month. The first half 2022 performance in global equities was one of the worse in many decades as markets continued to adjust to the uncertainty with regard to the pace of tighter monetary policy combined with slowing economic momentum.
The US Fed has increasingly signalled to the market the need to increase rates rapidly from the historical lows seen in 2021. The aim for the Fed is to create the required capacity within the economy to address inflation concerns without going into recession. Price stability is their primary focus as the alternative is sub-optimal. The heightened uncertainty for markets year-to-date remains primarily with the slowing economic pulse, rising inflation expectations and the aggressive forecasts of higher US cash rates. The subsequent increase in market volatility and the prospect of a US recession has weighed on sentiment whereby valuations have now become very compelling compared to long-run historical benchmarks. The discount to the price of future earnings has been very aggressive this year and we believe this is overdone. Going forward, we look for the upcoming US quarterly reporting season in July to confirm the pace of the earnings slowdown.
Performance Commentary - April 30, 2022 The K2 Select International Fund returned -3.0% for the month. April was a volatile month for global equity markets.
The increased currency volatility and fall in the AUD late April reinforced market uncertainty with US policy settings. We continue to take the view that support for commodities will remain into year end and subsequent strength in commodity currencies will result. The Fund maintains a hedging strategy that provides some capital protection against a rising AUD.
Uncertainty for markets continued due to ongoing concerns with rising inflation expectations and the implications for US rates. Central bank communication is important for markets and the US Fed has continued to reinforce tighter monetary policy settings ahead from the recent historical lows in rates. This follows their policy pivot in late 2021 as inflation risks continued to build.
The Fed increased rates by 50 basis points to 1.0% (upper band) at their May meeting and flagged to the market that additional 50 basis point rates hikes at their upcoming June and July meetings should be anticipated. A 2.5% Fed Funds rate is the neutral long-term target and would be conducive for stable markets going forward. Getting there within a year will create some pain for markets. In addition to higher US rates, the Quantitative Tightening (QT) will also have an impact for global markets. While addressing inflation risks the US Fed ultimately aims to engineer a soft economic landing.
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