October, 2020
The K2 Australian Fund returned +1.7% for the month of October and has now returned +6% this financial year. Since the March lows the fund is up a very strong +47% outperforming the benchmark by +11%. The combination of good stock selection and investing cash early in the recovery have contributed to the strong performance vs benchmark since
the March correction.
During the month, the Australian Treasurer delivered the 2020/21 Budget. For the year ahead the underlying deficit is expected to be $213 billion (11% of GDP) and gross debt is estimated to reach $872 billion (45% of GDP). The Budget included nearly $100 billion of support in response to the COVID pandemic. Personal income tax relief, business investment incentives, a targeted modern manufacturing strategy and new and accelerated infrastructure projects have all been designed to rebuild the economy. The RBA Governor also delivered a speech that suggested that interest rates could be lower for longer; potentially for up to 3 years. Then late in the month it was announced that Victoria would move out of COVID lockdown and gradually progress towards reopening. As a result of all these measures we believe that Australian listed market EPS growth projections will start to accelerate; greater activity will drive profit
growth which will no longer be diluted by overly cautious equity raisings.
The best performing holdings for the Fund were Pendal Group (PDL), Seven Group (SVW) and Macquarie Group (MQG) which rose 18%, 8%and 6% respectively. PDL is a recent addition to the portfolio. We believe that PDL is well positioned to benefit from a continuation of equity market gains. The asset management operations of JO Hambro are PDL's most profitable business. JO Hambro was acquired in 2011 and has subsequently generated more than $340 million in performance fees. JO Hambro's performance fees are determined on a December year end basis and could exceed $50 million this year. SVW and MQG are both well positioned to benefit from the Budget measures; SVW will see an improved level of demand from the construction sector whereas Macquarie always tends to leverage off heightened levels of infrastructure expenditure. The main detractors to performance were Austal Limited (ASB), BHP Group (BHP) and Corporate Travel
Management (CTD).
The Fund's net exposure for the month averaged 97.4%. The median holding for the Fund has favourable characteristics when compared to the All Ordinaries Index; using consensus forecasts for the year ahead the PE is 14% lower, ROE is 29% stronger, and the dividend yield is 22%higher. The market capitalisation of the median holding for the Fund is
more than 4 time larger than that of the All Ordinaries Index.
ticker: KAM0101AU
commentary_block: Array
factsheet_url:
https://investmentcentre.moneymanagement.com.au/factsheets/mi/n8y5/k2-australian-absolute-return
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asset_class: Domestic Equity
asset_category: Australian Long Short
peer_benchmark: Domestic Equity - Long Short Index
broad_market_index: ASX Index 200 Index
structure: Managed Fund