Frank, I have friends that work as financial planners at one of...

Frank,

I have friends that work as financial planners at one of the major banks and he has not been recommending his clients put money towards K2 due to their large fees and poor recent performance. (Their fees have been reduced since July 2017 for both management and performance fees.)

In the current low interest rate environment value investors are struggling to invest in good stocks at attractive prices. (Take a look at both Montgomery and K2). So they have been holding larger amounts of cash waiting for a market correction that has not happened yet. This hurts their performance and when you combine that with their stock portfolio not beating the market, their overall performance does not beat the market. Add management fees ontop and retail investors are getting less and less returns compared to index funds that charge less on fees too. So i agree with people buying the index but only when the index is fairly priced. (it looks expensive now and therefore fairly risky)

Also as index funds increase in size, the stocks they buy continue to go higher irrespective of the underlying companies performance. This can lead to stretched valuations for the large cap stocks. When a market correction does occur index funds may get smashed while the value investor holding alot of cash can benefit by buying the good stocks much cheaper. That is their recipe for outperforming the market.

This may take some time to occur and as a result i agree with your timing on buying K2. I have a habit of buying stocks too early and having to wait for a turn around to occur. This stock is quite different in that the majority of the outstanding stock is owned by the directors. This stock is very illiquid and it can be hard to buy or sell large amounts of stock in a short period of time. The price has dropped a fair bit of the late due to a director selling shares to other directors and on market.

I believe that this stock is good buying below 20 cents and may turn around sooner than expected or stay where it is for some time. AUM will continue to decline until performance is better than index funds consistently. I have no idea what AUM will be next year or what the fund performance will be but they will have good years and bad years. Overall dividend return and some capital growth should give a decent return when bought around 20 cents.

Drag