Thrift is the new cool: K2
Tuesday, 12 May 2009 12:45pm
From high-speed railway to high-tech alarms, fund manager K2 Asset Management banks on stocks that will flourish in the face of a global recession.
Nick Griffin, the group's head of international strategy, said that investors should tap into mega-trends that will drive stocks up as consumers adjust to a post-bull market lifestyle.
In the past, consumers "traded up", buying luxury goods, expensive cars and bigger houses.
In a recession, the trend reverses and consumers start trading down, cutting down expenses and "retrenching to their own castles", said Griffin.
"In the US, they call it ‘staycation', where staying at home is their vacation. You can see it through the Bunnings numbers, Home Depot numbers and video games sales."
This is why K2 Select, the fund's international equities fund, invests in stocks that taps into this trend such as gaming stocks Nintendo and Activision Blizzard, DIY stocks Home Depot and Kingfisher; and Pay TV operator BSkyB.
K2 also invests in security companies Brinks Home Security and Tyco because "in tough times, people are focusing on protecting what they've got," said Griffin, hence the rise of the "fortress home" mentality.
Following the same logic, Griffin said they have previously shorted luxury brand stocks such as L'Oreal, Louis Vuitton and Bulgari.
"From a valuation point of view, these stocks are trading at high multiples, priced like they are secular growth stories whereas in fact they are actually very cyclical and their growth will fall for longer than just the recession as consumers shy away from luxury brands," he said.
"Not just because they are expensive but because of what they represent…frugality is the new cool."
Besides the rise of the "fortress home" economy and consumers trading down, Griffin also invests in stocks that will benefit from the government stimulus packages, such as rail stocks Vossloh and Alstom; and those that are geared up for a "carbon economy", such as Shaw Group and China High Speed Transmission.
And with a portfolio tailored around stock selection rather than the index, Griffin said the fund targets "18 per cent per annum" through the cycle (with most investment cycles lasting five to seven years).
To date, K2 Select has returned 10.3 per annum since 2005 versus the MSCI World AUD index's loss of 2 per cent over the same time period. In the six months to April this year, the fund returned 8.2 per cent while its benchmark lost 13.5 per cent.
Asked whether the fund's 18 per cent target is realistic in the current markets, he said, "In the world of muted returns expectations, it is high. But that's what we wrote on our Product Disclosure Statement (PDS) four years ago and we still think it is achievable as this investment cycle matures.
Besides, the fund has the advantage of less competitors in the market as international equities fund managers overseas either merge or shut down. "There's a lot less capital chasing the same set of ideas."
Michelle Baltazar
This story was found at: http://www.financialstandard.com.au/news/view/25743
Printed: Wednesday, 8 September 2010 6:47am