K2 Asset Management’s stock-picking boosts performance fees

Profits have soared at K2 thanks to performance fee triggers.

K2 Asset Management (ASX: KAM) is a Melbourne-based listed fund manager with around $750 million under management. For the financial year just ended the company reported an after-tax profit of $13.2 million and paid full-year dividends totalling 5 cents per share.

The results were boosted by a surge in revenues thanks to funds outperforming against benchmark hurdles which triggered performance fees worth $24.3 million compared with just $124,000 the year before.

K2 offers three funds – the K2 Asian Absolute Return Fund with a fund size of approximately $100 million, the K2 Australian Absolute Return Fund with a fund size of approximately $400 million and the K2 Select International Absolute Return Fund, which has a fund size of approximately $250 million. The company also manages around $33 million outside of these three funds.

K2’s funds have performed well both since their inception and also over shorter periods including the 12 months to June 2013 as the following results highlight. Since inception in 1999 to the 31 August 2013 the Australian Fund has returned 12.89% per annum (pa), while over the past financial year the fund returned 26.1%. Since inception in 1999 to the end of August the Asian Fund has returned 10.82% pa, while over the past financial year the fund returned 30.2%. Since inception in 2005 to the 31 August 2013 the International Fund has returned 11.13% pa, while over the financial year the fund returned 24.5%.

The Australian Fund owns a mixture of both large blue chip stocks as well as a number of smaller companies. Three stocks that have recently been contributing to performance are Breville Group (ASX: BRG), Crown (ASX: CWN) and National Australia Bank (ASX: NAB). Since the start of the current financial year these stocks have performed very well indeed. While the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has gained 8%, Breville and Crown are both up nearly 25% and NAB is up 11%.

Foolish takeaway

K2 has a proven track record of outperformance. While this certainly doesn’t guarantee performance fees will be generated every year – the boost to earnings over an investment cycle from performance fees has the potential to be an important contributor to overall shareholder returns.

K2 raised its final dividend to 4 cents after paying an interim of 1 cent. Higher dividend pay-outs are just what many investors are looking for. Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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