K2 Asset Management saw outflows of $41.2m from a single investor during June in its underperforming K2 Australian Absolute Return Fund, as a result of the fund’s 70 per cent cash allocation weighing on performance.
In its monthly flows data, the firm said it lost $48.2 million during June with $41.6 million alone coming from that fund. K2 has since confirmed to Money Management that $41.2 million of this came from redemptions from one single investor.
Over the past year, the $143 million fund has lost 5.6 per cent versus returns of 9.4 per cent by its benchmark S&P ASX All Ordinaries index, according to FE Analytics. Assets had similarly fallen from $246 million to $143 million over the last 12 months, a loss of 46 per cent.
A K2 spokesperson said: “We had a large redemption from a single long-standing client who was reallocating away from equities and into defensive credit assets. They have rebalanced their whole portfolio and want to do it themselves instead.”
They said a reason for the exit was the firm’s long-standing weighting to cash across all six of its funds. The funds have been steadily increasing their cash weighting, currently 70 per cent, over the last 12-18 months and they said this could go up further to 100 per cent if the firm deemed it necessary. This was an unusual move as most companies opt to have a maximum of around 20 per cent in cash.
In its factsheet, the Australian Absolute Return Fund stated it aims to produce positive absolute returns over the long term with a capital preservation mindset and can utilise cash and shorts to protect capital.
The reason for the move into cash, they said, was because K2 were doubtful if this was a good market environment for value-biased funds.
“Markets have taken off on the back of growth and we are not positioned for that as our funds have a value bias, we are expecting a downturn.”
They admitted this was “not the market for cash” which was causing the underperformance of the funds but that the firm would not be changing its approach as it was positioned for the long term. However, it had increased its client engagement in light of the “mixed” feedback it had received from investors.
“We don’t make changes based on short-term market moves, we are positioned for the long term and we don’t foresee a rosy outlook and think valuations are stretched so we are happy to hold cash for now.
“Client feedback has been mixed but they are not looking for us to shoot the lights out, they are with us because they want capital protection. We have increased our engagement with clients over the past two years to ensure we have consistent messaging on what we are trying to do.”
Asked how long it expected to retain the cash positions, the firm said it was waiting to deploy the cash at an appropriate level but this may not be for another six to 12 months or until there was a rollover from growth to value.