Actively-managed funds have had a bad reputation in recent years. High fees and poor performance have resulted in the outflow of money from active funds to passive funds. But that’s not to say that there are no active funds that can outperform the market.
DKAM Capital Ideas Fund, run by Donville Kent Asset Management, is one such fund. From its inception in 2008 to 31 January 2020, the North American-focused fund has delivered a compound annul return of 17.2%, compared to the S&P 500’s 11.7%.
For a fund, even outpacing its relevant index by a few percentage points can be hugely rewarding for its investors. This can be seen in the huge difference between DKAM Capital Ideas Fund’s total return and the S&P 500’s. Cumulatively, the fund’s total return since inception is 503.7%, compared to the S&P 500’s 251.9% over the same 12-year period.
With such an impressive track record of growing shareholder wealth, I decided to take a look at some of DKAM Capital Ideas Fund’s materials to see what is the secret behind its success.
It looks for compounders
Some funds invest in “value stocks” and wait for these stocks to rise to their true value before selling. While this is a decent strategy, it requires active management of capital once these “value stocks” hit what the fund managers believe is their true value.
DKAM Capital Ideas Fund, on the other hand, invests in true compounders. Compounders are companies that can grow their value multiple-fold over the long term. True compounders have much higher upside potential and investors need not move in and out of positions to reap the gains.
A broad approach to screening
To look for these compounders, DKAM Capital Ideas Fund uses a broad approach to screening and idea generation.
The first step the fund manager takes is to screen for companies that have a high return on equity, typically more than 15%. A high return on equity suggests that a company is making good use of its shareholders’ equity to generate returns.
On top of that, the fund manager also sources for potential new ideas through the use of other basic screens, communication with industry contacts, the media, and publications.
This broad approach to idea generation has enabled the fund to unearth lesser-known companies.
For instance, as of 31 January 2020, 25 of DKAM Capital Ideas Fund’s positions are not in any major indices.
Long-short but with with a bias towards long
As a long-short fund, DKAM Capital Ideas Fund goes both “long” and “short” equities. (To go long means to invest in stocks with the view that they will appreciate in price; to go short means to invest in stocks with the view that they will decline in price.) The table below shows the fund’s exposure as of January 2020.
The short position covers some of the market’s downside risk while the long position is able to leverage up due to hedges from the shorts.
But overall, the net exposure of the fund is still 100.5% long.
DKAM Capital Ideas Fund short strategy is based on factor analysis and consists of companies that are essentially an inverse of its investment framework.
Bias toward small caps
Donville Kent Asset Management also believes that the small caps universe provide a unique opportunity.
Companies with small market capitalisations are less well-known and hence may have a good risk-reward profile. In a recent article, the fund noted that the top-performing stocks in Canada over the past decade started with an average market cap of C$796 million in 2009. The article explained:
“This is definitely on the small side and many of these stocks would not have met the minimum size requirements for most investors in 2009. We think this is where a lot of the opportunities are, hence why it is important to be open to investing in small companies. Every big company was at one point a small company. Looking back over the trajectories of these companies over the last 10 years shows that strong growth is definitely possible.”
The Good Investors’ view
DKAM Capital Ideas Fund is a fund that stands out in an industry that is gaining a bad reputation in recent years. Its long-term performance is driven by an approach that has enabled them to find gems that other investors have yet to uncover.
If you wish to read more of their investing insights, you can head to the ROE Reporter (the name of its newsletter) segment of the fund’s website.
Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.