K2 Asian Absolute Return aims to deliver superior risk adjusted returns through the investment cycle. Our target return is 10+% p.a. over the long term. We 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 Asian Fund returned +0.83% for the month outperforming the index by +2.94%. The fund is now up +5.3% over the past three months. Maintaining an underweight to China has been positive for the fund.
The economic theme within the APAC Region over the past two years is the consistent weaker economic momentum for mainland China. The key challenge for the second largest economy is dealing with the consequences of the very sharp and depressed property construction sector. The impact on other key partial economic indicators has also been severe. This is clearly evident in the weak consumer and business sentiment. The high debt levels the property sector are also notable headwinds and a challenge for Beijing as they look to deliver another stimulus package to help drive domestic demand.
Given the challenges from the property sector in China, it is no surprise that monetary policy has been accommodative while other economies have been raising interest rates. The central bank, the PBOC has been stimulating their economy. While this has helped cushion the downside many challenges remain. In particular, the regulatory over reach by in 2021 has been a negative for global investors who remain underweight. Further, the large debt ratios and property construction sector headwinds have combined to hold back the China recovery.
What is K2 Asian Absolute Return K2 Asian 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 Asian Absolute Return has Assets Under Management of 10.97 M with a management fee of 1.36%, a performance fee of 0.04% 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 Asian Absolute Return has returned -1.72% in the last month. The previous three years have returned -10.05% annualised and 14.29% each year since inception, which is when the K2 Asian 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 Asian Absolute Return first started, the Sharpe ratio is NA with an annualised volatility of 14.29%. The maximum drawdown of the investment product in the last 12 months is -6.23% and -34.38% 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 Asian Absolute Return has a 12-month excess return when compared to the Foreign Equity - Long Short Index of -5.27% and -3.36% 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 Asian Absolute Return has produced Alpha over the Foreign Equity - Long Short Index of NA% in the last 12 months and NA% 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 Asian Absolute Return provide? K2 Asian Absolute Return has a correlation coefficient of 0.69 and a beta of 0.69 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 Asian Absolute Return and its peer investments, you can click here for the Peer Investment Report.
How do I compare the K2 Asian Absolute Return with the Developed -World Index? For a full quantitative report on K2 Asian Absolute Return compared to the Developed -World Index, you can click here.
Can I sort and compare the K2 Asian Absolute Return to do my own analysis? To sort and compare the K2 Asian Absolute Return financial metrics, please refer to the table above.
Has the K2 Asian 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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Performance Commentary - August 31, 2023 The K2 Asian Fund returned -0.15% for the month. The weaker economic data pulse In China continued to weigh on market sentiment. This has been a consistent feature as the regular economic data flow reinforces the softer momentum for the second largest economy compared to expectations. Further, high government debt levels and concerns with the property market are key structural headwinds for Beijing. Hence the soft consumer and business sentiment creates additional challenges for policy makers to turn things around.
The policy response has been targeted and active with limited effect to date. The central bank in China, the PBOC has been persistent with their monetary stimulus over the past two years. While it is clear they are not too keen to go down the quantitative easing pathway, their stimulus is measured and pragmatic given the very large levels of debt within their property sector and municipal/local government level.
On the positive side, the recent weekly data flow in China indicates some consolidation of the run of weak partial economic Indicators. While there limited upside to the data flow by year-end, the worst looks to be behind for now as recent stimulus measures are expected cushion the downside. Economic revisions to China GDP will continue to be revised from the mid 5% levels earlier this year to just under 5%. The lower inflation data coming out of China is positive for other key global economies.
The recent announcement regarding the expanding BRIC economic members lead by China may be a positive longer-term alignment for additional free trade agreement and therefore economic activity However, in the shorter-term China will continue to rely increasingly on their domestic demand which will require additional stimulatory policy support. Further, the case for global investors to increase their exposure to longer duration investments remain limited. An underweight exposure will continue to remain for many developed market investors. Some scope for short term tactical positions
beneficiaries of the China slowdown within the region continues to be Japan. India and the South-east Asia region (including Australia). We continue to maintain underweight exposure to China and an overweight to South-East Asia Pacific. A focus on earnings that export to China Livs continues to be our preferred investment strategy.
Performance Commentary - July 31, 2023 The K2 Asian Fund returned 4.63% for the month to outperform the index. The strong monthly performance of the fund has been the result of the underweight to China and overweight to SE Asia, the Pacific and other global regions. Some of the best sector and stock contributors to the monthly performance have been the energy sector that includes Beach Energy (BPT), Karoon Energy (KAR) and Woodside (WPL). Other good performing sectors included financials, Kina Securities (KSL) and JP Morgan (JPM). Also, exposure to the NZ aged care and residential sector, Winton Land (WTN) and Summerset Group (SNZ).
Increasingly markets globally are becoming more comfortable with a soft economic landing scenario. The regular economic data flow from key leading developed economies reinforces the resilience of aggregate economic, credit conditions and earnings. The strong labour market conditions in the US have been supportive despite the most aggressive tightening cycle for a generation from the Fed. Further, the consumer and business sentiment indicators appear to be holding up in the US compared to other economies such as the EU region, the UK and Australia. Key global central banks, particularly the Fed are well placed to engineer a soft landing which implies that rates will stay higher for longer.
China continues to disappoint with ongoing weaker than expected economic data as conditions for households and corporations in China remain challenging. There are early signs of some consolidation within the China property sector that has witnessed a sever correction. Ultimately the central bank in China, the PBoC will need to continue their stimulus program, become a little more innovative with their policy and try to turn around investor and consumer confidence in mainland China. On the positive side, the lower inflation data coming out of China is positive for other key global economies. Within the broader APAC region, Japan, India and the South-east Asia region (including Australia) will continue attract investors as China works through their much needed economic stimulus and reforms.
We continue to maintain underweight exposure to China and an overweight to South-East Asia and Australia. A focus on earnings that export to China continues to be our preferred investment strategy as they look at additional stimulus going forward. The portfolio cash position is marginally lower at 5.1%.
Performance Commentary - June 30, 2023 The K2 Asian Fund returned -0.68% for the month to be -0.62% year-to-date (YTD).
The stalled economic recovery within China continues to weigh on market sentiment for the worlds second largest economy. While key developed economies, led by the US, continue to exhibit resilience in economic momentum and aggregate corporate earnings, many challenges persist for the China as they try to stimulate their economy.
The central bank in China, the PBoC has continued to do a significant amount of the stimulus to date and has been proactively lowering interest rates to help drive a more sustainable recovery. However, both household and business sentiment in China continue to remain weak. This is partly due to the aggressive corporate clampdowns in the March quarter of 2021, combined with the relatively high youth unemployment rate and their notably large property sector challenges.
Beijing is looking to become more innovative and recalibrate and adjust their policy mix to stimulate economic activity. Some longer-term reforms on first glance look pragmatic. This includes China rolling out several economic reforms to address structural issues, including reducing reliance on exports, promoting domestic consumption, and improving their business environment.
However, in the shorter term it has proved difficult to attract global investors for long duration investments. This is clearly a critical area they need to address and the recent open dialogue with US officials is an early and welcomed sign of some commitment to resolve many different trades issues.
Within the broader APAC region, Japan, India and the South-east Asia region (including Australia) will continue attract investors as China works through their reforms.
We continue to maintain underweight exposure to China and an overweight to South-East Asia and Australia. A focus on earnings that export to China continues to be our preferred investment strategy as they clows look at additional stimulus going forward. The portfolio cash position is marginally higher at 7.8%.
Performance Commentary - May 31, 2023 The K2 Asian Fund returned -1.34% for the month to be flat (+0.1%) year-to-date (YTD) in a volatile market. The investment outlook with the APAC region continues to exhibit some unevenness across economic momentum and the earnings outlook.
The largest surprise has been the slowdown within China, the second largest economy, so soon after a very robust reopening. The slowdown in the various partial economic indicators for China has been a surprise given the previous strong tailwind associated with their reopening trade from last year. Within the South-East APAC region, it is a little different as there is some resilience to economic momentum despite the tighter monetary conditions. There is a clear global slowdown underway which is the clear result of restrictive monetary conditions within many economies as they address the stubborn, but falling, inflationary conditions.
Despite the slowing momentum, corporate earnings have not slowed as much as anticipated and have surprised expectations. This resilience in corporate margins (aggregate) imply that the slowdown ahead will not be as bad as previously thought. Markets are simply looking through this slowdown, or shallow recession in some regions, and pricing the recovery in 2024 and beyond.
The key challenge within our region will be the outlook for China. Unlike other key economies they have been cutting rates and do not have a severe inflation problem. Despite the PBoC cutting rates for well over 18-months, the slowdown in activity is concerning. Once Beijing adjust their policy mix and get through their property market correction and address the very soft business and consumer sentiment, they will be better placed to drive more sustainable but lower economic growth rate.
The largest beneficiary of the slowdown in China economic momentum following their extended lockdown policy is the re allocation of investment towards the South-east Asia region (including Australia) and Japan. We continue to maintain underweight exposure to China and an overweight to South-East Asia, Australia and NZ. A focus on earnings that export to China continues to be our preferred investment strategy. The portfolio cash position is 4%.
Performance Commentary - April 30, 2023 The K2 Asian Fund returned +0.26% for the month to be +1.43% year-to-date. Market conditions within the APAC region continue to remain mixed which has been reflected in the uneven nature of partial economic indicators and the differences in the policy response. The global backdrop year-to-date can be summed up as resilient vs previous expectations for a deep economic recession.
While conditions are slowing, aggregate corporate earnings have not slowed as much as anticipated. Companies are trying to protect their margins and prepare for the upcoming economic recession. To date the slow down is not as severe as expectations six months ago. Consensus expectations for the downside to earnings for 2023 have improved but will still be negative (circa minus 8-10% range) for 2023. This is off a higher corporate earnings base in 2022 and also reflects the ability for the corporate sector to pass on higher prices to date to consumers. The tight labour market has helped. There are plenty of challenges ahead, particularly the stubborn services inflation which will imply monetary policy will remain restrictive. Higher rates for longer combined with ongoing quantitative tightening will lead to additional contraction ahead, particularly the price credit market. Looking through the second half 2023 contraction, markets are pricing in the 2024 recovery profile.
The challenges will continue to be the policy response to address inflation. The second largest economy, China has a different set of challenges. The PBoC has been cutting rates for well over 18-months and they do not have the same inflation concerns as many other key developed markets. However, they are dealing with a notable slowdown in economic activity compared to expectations and the consequences of their property sector correction. Never-the-less, the ongoing opening of their economy will continue to assist cushion the downside risks to global growth as their economy increasingly relies on domestic demand as a larger contribution to growth.
The largest beneficiary of the extended China lockdown policy in recent years is the re direction of global investment into the South-east Asia region and also the Japanese equity market. We continue to maintain underweight exposure to China and an overweight to South-East Asia, Australia and NZ. A focus on earnings that export to China has been our preferred strategy for the China reopening trade. The portfolio cash position is just above 5%.
Performance Commentary - February 28, 2023 The K2 Asian Fund returned -1.48% for the month outperforming the index by +0.53%. Following recent strong performance, global markets consolidated as investors continue to digest the weekly global data flow for signs of improved inflation signals to better understand the interest rate outlook. Economies in the west continue to navigate the stubbornly high inflation outlook.
Good signs continue via various data points that reinforce “goods” inflation continues to fall. However, the services portion of inflation remains too high for central bank policy makers. The tight labour market has effectively supported the services side of the economy and as a consequence, wage indicators have remained elevated and a concern for policy makers. Given the higher for longer inflation outlook, central bankers - led by The Fed - will continue to remain hawkish with their commentary. The alternative of tolerating higher inflation is very sub optimal for investors, the corporate sector and households. A delayed response to inflation implies a much higher unemployment rate, contracting economic conditions and negative earnings and credit conditions. Economic conditions within China are on a different trajectory compared to other key economies. While the China re opening narrative has been mixed, the economic momentum continues to improve in aggregate. China domestic demand will continue to be a larger portion of China GDP.
Further, the inflation rate in China is notably lower compared to most of the world allowing their central bank - The PBoC - to remain supportive and stimulatory. Concerns in China remain with regard to the property correction and finding a reasonable resolution. This includes some government and PBoC support for funding. The aim is to improve bad and doubtful debt provisions and attract additional funding to try and improve investor sentiment. While Beijing has worked to improve internal capital flow, the key concern is the ability for China to attract long term global capital. While some short term investments are occurring, many global pension funds continue to lower their duration investments on mainland China. This has further supported the South-East Asian region as a notably alternative for investors. We continue to maintain underweight exposure to China and an overweight to South-East Asia, Australia and NZ.
Performance Commentary - January 31, 2023 The K2 Asian Fund returned 5.96% for the month outperforming the index by +2.15% in January. The equity market rally reflects markets are more comfortable that the downside risks in 2023 will not be as bad as previously thought. The key economic data updates in recent months have continued to show evidence of improving economic conditions versus previous expectations of a hard recession.
The improvement in expectation is reinforced by the resilience of key developed market economies despite the tightening in monetary policy. Hence the market volatility has subsequently fallen. In particular, the resilient labour market conditions and the continued lower inflation inputs from recent highs have been key drivers in the recent rally. The higher cash rates are creating the required demand destruction and economic pain that the central banks have been targeting which has led to the lower inflation prints. Although it is notable that the services inflation is stubbornly high the goods inflation is falling.
The repricing of the downside risks has also been evident in the better earnings outlook in the US (aggregate) downside. Credit conditions have also remained in good condition despite the slowdown and impairments remain at near cycle lows. While there is more tightening to come from global central banks they are slowing the pace of rate hikes as we approach peak cash rate cycle. In anticipation, long bond yields continue to fall maintaining the yield inversion.
The continued fast track opening of the China economy following years of persistent lockdowns will be a net positive for global growth this year. There is targeted stimulatory policy and the internal economic activity in itself will be a key economic driver for the worlds second largest economy. The recovery of the China economy will also benefit key EU based economies companies that are correlated. Also, the targeted support for their housing sector from funding rates to developer support has gone a long way to assist in improvement of sentiment. Importantly, South-East Asian economies and companies are beneficiaries of global trade. We continue to maintain underweight exposure to China and an overweight to South-East Asia, Australia and NZ. The portfolio cash position is around 10%.
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