The successful listing of the Kapstream Investment Trust (ASX:KIT) represents a significant milestone for investors seeking diversified income in fixed income markets.
The Trust raised approximately $205 million through its initial public offering and will invest in a diversified portfolio of investment-grade Australian and global fixed income securities, alongside Australian private asset-backed securities typically structured through warehouse financing. Proceeds from the IPO will be invested in accordance with the Trust’s investment strategy. KIT targets a return of RBA Cash Rate plus a 3.5% margin per annum while providing investors with monthly distributions.
Importantly, the IPO was completed against a backdrop of heightened global market volatility and geopolitical uncertainty, highlighting the strength of the investment strategy and the credibility of the team at Kapstream Capital, which manages more than $12 billion across credit strategies.
The venture began nearly a year ago when a wealth management team approached Mantis Funds seeking an income-focused investment solution. The result was the creation of a listed investment trust structure designed to deliver regular income and a consistent margin above cash. The venture involved close collaboration between the investment manager, distribution partners and advisers.
Key leadership came from Kapstream Capital’s investment team including Dylan Bourke, Daniel Siluk and Mark Bayley, while the initiative was driven on the distribution side by Damien Hatfield and Timothy Cheung of Mantis Funds. The broader Mantis team supporting the transaction included Anthony Ng, Mike Healey, Archie Taylor, Rachel Walker, Kwame Owusu and David Gray.
“Timothy Cheung and myself would like thank our Mantis Funds team, in particular those members who fly under the radar but punch above their weight. I couldn’t ask for a better team to work with. Many thanks to the Kapstream team who are true professionals highlighted by the fact that they manage in excess of $12 billion in Credit Funds. I’d also like to acknowledge Janus Henderson Investors for their support throughout this project.”
Damien Hatfield, Founder and Head of Distribution, Mantis Funds.
The IPO was supported by a strong syndicate of advisers and distribution partners, including Ord Minnett, which acted as Joint Lead Arranger and Joint Lead Manager. Additional support came from CommSec, Evans & Partners, Taylor Collison and MST Financial, with key contributions from Steve Anagnos, Cameron Duncan, and Gerard Satur. Legal support was provided by Corrs Chambers Westgarth, and the project was further strengthened through collaboration with Janus Henderson Investors.
The Trust is now listed on the ASX, marking the successful culmination of a year-long collaborative effort across multiple firms and teams.
With the IPO completed, the focus now shifts to executing the strategy and delivering consistent income outcomes for investors through the Kapstream platform.
For investors seeking further details, the latest trading price and market information for Kapstream Investment Trust (ASX:KIT) can be viewed here or on the ASX website.
We believe the Australian hedge fund market is approaching an important inflection point as investors increasingly seek scalable, resilient strategies capable of delivering genuine diversification in a more volatile global environment. However, many investors are still bewildered by the breadth of strategies out there. Separating the pretenders from the real deal can be challenging.
We have put together a white paper to serve as an updated introduction to the +$60 billion Australian hedge fund industry. It covers:
Australian hedge fund classification by strategy and size,
Long-term performance of hedge funds by strategy,
Allocation trends amongst institutional investors to hedge funds, and
The opportunity for more genuine low beta funds to enter the Australian market.
We believe that we are on the cusp of a rapid disruption in the financial industry as Artificial Intelligence (AI) becomes a game changer in the world of alpha generation.
To that end we have attached a brief white paper, “Artificial Intelligence, Natural Alpha” which covers our thoughts on:
What is AI and what can it do differently
How to use AI to extract alpha, and
Key Hurdles – collaborative intelligence or an autonomous future?
With the neural complexity of AI accelerating exponentially, we hope this paper provides a timely exploration of the opportunity AI provides for managers who are able to stay ahead of the curve.
As ‘black swan’ sightings become increasingly common, tail-hedging strategies, which are designed to protect portfolios during extreme market downturns, are drawing renewed attention from investors seeking resilience in uncertain markets.
In light of current market conditions, marked by high valuations, a relatively low VIX and escalating geopolitical tensions, we hope the attached paper, “If it looks like a black swan and swims like a black swan”, provides a timely analysis of the tail hedging strategy.
Specifically, we examine:
The key methods to implement a tail-hedging strategy, and
Tail hedging as a long-term wealth-building tool.
Protecting against catastrophic losses.
Providing liquidity to buy the dips.
Managing retirees sequencing risk, and
Countering the behavioural bias of investors who habitually under allocate to risk assets.
Given the current period of elevated global uncertainty, we have been considering effective opportunities to hedge against potential stock market volatility.
To that end, we have a brief white paper which covers our thoughts on the Merger Arbitrage strategy:
How it works
The reasons to invest, and
Why now is the opportune time to invest.
We hope it provides a timely exploration of the value that market-neutral, absolute return hedge fund strategies such as merger arbitrage can bring to a portfolio.
The evolving global investment landscape offers opportunities for collaboration between overseas managers and Australian distributors. Atlantic House, Co-founder Andrew Lakeman spoke to Money Managements Laura Dew about the hoops managers are required to go through with the ever-increasing regulations.
“The route to market is hard unless you have thousands of dollars to burn. If you want to come here, then you need to have a niche, such as alternatives. You can’t just be a global equity firm and expect to get a mandate from a super fund.”
Now is the time for high net-worth investors to add alternative assets to their portfolios to provide better returns, increased diversification and tailored solutions. In this paper we look at the key benefits of, and the hurdles to, investing in alternative assets as well as trends which will drive increased investment in the future.
Following the mini growth scare over the northern hemisphere summer, culminating with the (mini) correction in the S&P500 (the global risk proxy) in September, there has been an encouraging rotation back into value and cyclical sectors. Our sense is that this is durable. However, further reflation and inflation is likely to contribute to ongoing discomfort about rising rates over the next 18 months. That was heightened overnight after a hawkish taper by the Bank of Canada. As we have noted before, those concerns are unlikely to end the equity bull market, but the gains will likely moderate and volatility will probably be higher. Critically, there is also likely to be a sustained shift in relative performance within the equity market.
One of the key developments since late September has been the rise in future expected short rates. Both the 2 and 5 year Treasury yields have risen another 25 basis points (or so) in October. While the policy rate is likely to remain anchored until the middle of next year, the fixed income markets are obviously forward looking. Historically the 5 year yield has tended to lead the Fed Funds Rate, through the cycle (chart below). Overnight there has been a material flattening of the curve as well after the hawkish move by the Bank of Canada to end QE. The magnitude of the move in the US 2s/10s curve was also likely exaggerated by the timing of the Fed rate hike expectations and the asset purchase program that has artificially supressed the long end of the yield curve.
While the early stage of a macro recovery typically sees the fastest equity market gains in an economic cycle, this is the stage where macro strength is unambiguously positive for equities (as there is little impact on inflation). However, as the cycle matures and the output gap (or unemployment gap) closes, capacity constraints tighten and macro strength increases concern about rising inflation or rising rates. The big picture point is that equities continue to rally in this phase, but the pace of gains slow, and corrections (consolidations) are more likely. The additional support for equities is that the equity risk premium is still abnormally high, particularly in Asia.
It is of course difficult to see a sustained move higher in long end yields if the recent deceleration in growth persists. Moreover, if there was an extension of the energy driven inflation should that might lead to demand destruction and growth disappointment. It is notable that GDP revisions (based on the Atlanta Fed) have slowed close to zero in Q3 (chart above). All measures of consumer confidence have peaked, the purchasing manager surveys have rolled over and as we noted above the yield curve has started to flatten. On the positive side, some of the negative influences on growth such as the credit impulse in China and the delta variant should start to improve over the coming months.
For quite some period of time we have emphasized in our monthly portfolio commentaries (for the Firth Asia Systematic Equities Fund [FASEF]) some unusual aspects of market trading activity. The points have particularly focused on:
Performance being driven by liquidity flows rather than relative stock fundamentals;
This performance has been highly concentrated in a small number of large cap names; and,
The extreme longevity of this behavior.
Typically, while markets often feel rather irrational, they are in fact anchored by the underlying fundamentals, and expectations for future fundamentals are anchored by current fundamentals. Simply, markets don’t normally get too far ahead of themselves. The key exceptions to this occur at cycle extremes. Either:
Very late cycle when true “irrational exuberance” takes over and every taxi driver and their dog is buying stocks. i.e. the final liquidity-driven blow-off rally at the end of the cycle; and,
In the depths of a substantial market sell-off when the proverbial baby is thrown out with the bath water and investors capitulate to an end of the world scenario.
The saving grace for medium to long term stock investors, who are buying/selling based on the fundamentals, is that these two scenarios have historically been short-lived; e.g. one to three months in the case of scenario 1 and potentially only a matter of days in the case of scenario 2.
What is so unusual to date is that these characteristics have been present for arguably 3 years plus. We have never seen such concentrated market performance for such an extended period of time.
To illustrate market performance concentration, we calculated the proportion of total market monthly returns driven by the 10 largest contributors to those monthly returns, every month back to 2001, for a sample of over 2000 Asia ex Japan firms. We then smooth this time series (12 month moving average), and results are presented in Figure 1.
Prior to 2013 the 10 largest contributors to monthly performance represented around 25- 35% of those returns. However, through 2014 and onwards this has increased to around 50%. That is, half the market return comes from just 10 stocks.
Given we manage a highly diversified portfolio strategy, driven by the relative fundamentals of stocks, and with high active share, our relative performance has been constrained by this behavior…especially given the biggest drivers of index performance have tended to be trading on what by any historic standards could be viewed as extremely rich pricing. By way of example, the most recent 10 biggest contributors to market performance in Figure 1 have an average PE of just under 30x. That is a huge amount of future growth already baked into stock pricing. Performance concentration in Asia ex Japan is further aggravated by the domination of this by just two industries in one country—Chinese insurers and, in particular, technology-related firms.
Figure 1. Performance Concentration: Asia ex Japan proportion of market performance driven by the top 10 contributorsWe took a sample of more than 2000 Asia ex Japan firms (meeting minimum size and data requirements), and calculated the proportion of monthly aggregate market performance represented by the 10 largest contributors to that market performance. This process is repeated monthly back to 2001 to generate a time-series indicator of market performance concentration, including adjustment for changes in sample size in early historic data. A rolling 12 month median value for performance concentration is calculated, which is further smoothed by averaging over rolling 12 months. This moving average is presented in the chart.
As a key part of any assessment of what happens next we desire to know what is driving this performance concentration. However, answering this is very difficult. Is it a consequence of ETF flows (which in turn are driven by highly supportive liquidity dynamics that favour passive over active investing)? Is it a consequence of surging investing activity in China and by Chinese investors (and, again, favourable liquidity dynamics in China)? Is it a consequence of high frequency and machine learning algorithms (which represent a huge proportion of trading activity) chasing each other’s tails and being trained to follow the liquidity trail?
Ultimately we can only speculate on the real answer. Nonetheless, there is nothing in any of these explanations (nor in any others we can think up) which imply a permanent shift in how stocks ultimately trade. We cannot envisage a scenario in which fundamentals never again matter.
So what is the catalyst for reversion to trend? Possibilities include any tightening in liquidity conditions (which China is attempting to achieve in a highly controlled fashion) and/or a significant slowing in global economic growth (something that is increasingly being forecast by market commentators, government organisations, and the like).
As we wrote in our April 2019 fund report, our systematic strategy has been carefully constructed for optimizing expected risk/return dynamics across the macroeconomic cycle, i.e. an extended multi-year time frame. To simply chase liquidity and price momentum in a selection of stocks that have been doing very well is not only just not something that is a part of our process in any way, shape or form, it is also anathema to our investment philosophy. Hence, we will not consider re-jigging our process to simply neutralize our exposure, buying Alibaba, JD.com and the like.
We recognize this approach therefore has near term risk if China stocks continue to defy the gravitational forces of stock fundamentals (which have been steadily weakening). Indeed, this has been a major problem for factor-based investors around the world, and has even resulted in the closure of some high profile funds.
While being wary any time investment commentators use some variation of the phrase “this time it is different”, we must recognize that the length of time to date that market performance has been highly concentrated (and thus negatively impacting our highly diversified portfolio) is uniquely long. History tells us that the unwinding should be commensurately strong. After extensive re-analysis over the last few months of our strategy, its drivers, its risks and its expected outcomes we remain firm in our conviction that backing quality, robust growth and refusing to overpay for it remains the best longer term strategy.
