Performance summary

The CC Sage Capital Absolute Return Fund returned -0.75% in March versus the RBA Cash Rate return of 0.35%.*

The CC Sage Capital Equity Plus Fund returned -7.63% in March versus the ASX/S&P 200 Accumulation Index which returned -7.15%.*

Quarterly contributors and detractors to performance

The portfolio's performance across the March quarter was largely driven by powerful and unprecedented global thematics that have been extremely challenging to fully hedge against within the framework of Sage Capital’s portfolio construction. While the onset of the conflict in the Middle East and the subsequent energy supply shock captured market attention, it was the growing threat of AI disrupting existing business models that had the biggest impact on the portfolio. Frustratingly, this outcome was not driven by the Growth group^, where Sage Capital had established an underweight position in SaaS companies, having earlier identified the threat to pure software models from AI coding tools. Rather, it was within the Defensives group where AI disruption rapidly took hold, spilling into gaming companies and insurance brokers. There was also an element of large-cap active-to-passive rotation, with well-held stocks falling as bank underweights were closed.

The strongest contributor to performance for the quarter was the Domestic Cyclicals group, with the Defensives and Yield groups being the biggest detractors. Within Domestic Cyclicals, positive contributors included short positions in a range of consumer discretionary retailers, which were weak on the back of the RBA interest rate hikes and rising headwinds to disposable income due to the conflict in the Middle East. A long position in Ampol (ASX: ALD +8%) also contributed positively, as the closure of the Strait of Hormuz drove refinery margins to record highs.

Given the macroeconomic volatility generated by AI disruption and the conflict in the Middle East, it is worth highlighting that both the Growth and Resources groups delivered relatively flat performance contributions, reflecting the resilience of positioning in an unusually complex environment.

Within the Growth group, key positive contributors were a short position in Pro Medicus (ASX: PME -47%), which was trading on a premium valuation, then de-rated sharply, leading to a sell-off due to the dual pressures of AI disruption fears and rising bond yields. A long position in Telix Pharmaceuticals (ASX: TLX +22%) also delivered a strong result, with the company making several announcements which supported investor confidence in its earnings profile and research and development pipeline. A short position in Seek (ASX: SEK -40%) proved to be profitable as the stock weakened amid fears of AI disruption and potentially weaker job listing volumes.

Offsetting this, long positions in Zip Co (ASX: ZIP -53%), and Life360 (ASX: 360 -44%) weighed on the portfolio as both stocks sold off on the AI threat thematic despite strong earnings performances. In the Resources group, positive contributors were long positions in energy stocks including Santos (ASX: STO +29%), and Karoon Energy (ASX: KAR +34%) which benefited from rising oil prices, although this was offset by short positions in Woodside Energy Group (ASX: WDS +49%), and New Hope Corporation (ASX: NHC +46%). The portfolio held a slight underweight to the energy sector and overweight exposure to copper heading into the Middle East conflict. Sage Capital moved quickly to address these exposures, seeking to mitigate these risks without undue impact to the portfolio.

In the Defensives group, long positions in Goodman Group (ASX: GMG -18%), Light & Wonder (ASX: LNW -24%), Aristocrat Leisure (ASX: ALL -22%), and ResMed (ASX: RMD -10%) all dragged on performance over the quarter. Goodman Group underperformed the market along with its international peers despite its positive exposure to AI through its datacentre development pipeline, while the gaming stocks fell amid fears that AI coding tools would create online versions that would rapidly replace them. ResMed was under continual pressure despite another exceptional earnings result that delivered further margin expansion. Within the Yield group, underperformance in the portfolio was driven by a range of moderate long positions including Suncorp Group (ASX: SUN -7%), Challenger (ASX: CGF -10%), AMP (ASX: AMP -27%), Computershare (ASX: CPU -15%) and Insurance Australia Group (ASX: IAG -6%), as well as a short position in Westpac Banking Corporation (ASX: WBC +2%).

General insurers sold off during the period due to softening pricing trends, despite strong results. This weakness further accelerated concerns that AI would drive pricing competition across the sector. Computershare also fell victim to the AI disruption thematic on concerns that tokenisation could pose a threat to its business. Challenger was hit by uncertainty surrounding US private credit markets, while AMP delivered a weak result driven by lower-than-expected platform margins. Westpac, alongside the broader banking sector, performed well on the back of better top line credit growth, although to some degree, this is a backward-looking indicator. Positively, the portfolio’s long positions in National Australia Bank (ASX: NAB -2%) and QBE Insurance Group (ASX: QBE +11%) contributed to returns. As a broad observation, there appeared to be a shift from well-held institutional stocks to underheld areas such as banks, possibly reflecting an acceleration in the shift from active to passive management.

Portfolio Positioning and Outlook

Market conditions remain unusually sensitive to geopolitics, with the near-term outlook still heavily influenced by developments in the Middle East. While the range of outcomes remains wide, a likely implication is that any disruption to energy markets could leave a lasting economic imprint, even if the conflict de-escalates in the near term. Australia is more exposed than the US to this dynamic given its dependence on imported refined fuel, and the escalating conflict comes at a time when domestic monetary policy has already tightened. A sustained increase in not only oil prices, but gas, fertiliser, aluminium, ammonia nitrate, sulphur and petrochemical feedstock prices threatens a broad inflationary impulse. This leaves the RBA in a tough position, and Sage Capital’s highest-conviction view is that inflation will continue to erode consumers’ disposable income, particularly if the RBA tightens monetary policy even further. For companies, the challenge will be to absorb or recover higher fuel and other input costs through pricing, while navigating demand sensitivity and an uncertain macroeconomic backdrop.

That backdrop informs Sage Capital’s cautious stance toward discretionary retail. The consumer environment has been relatively resilient but is becoming increasingly constrained. Higher mortgage servicing costs and fuel prices reduce household flexibility, and in that setting, spending becomes more selective, more value-conscious and more responsive to promotions. For retailers, this leads to headwinds of slower volume growth, less ability to pass on price increases and continued pressure on operating costs. Sage Capital therefore remains selective in this sector and prefers businesses with stronger pricing power, more resilient demand profiles and earnings drivers that are less dependent on a buoyant consumer environment.

A dynamic that Sage Capital views with reasonable conviction is the likely acceleration in renewable energy and electric vehicles (EVs) in response to higher fossil fuel prices. This may be driven through both government policy and private sector demand. Within the resources sector, this favours metals exposed to electrification such as copper, lithium, rare earths and aluminium. Historically, energy and the refining companies have benefited from periods of significant supply disruptions, which at present remain unresolved. The damage to energy and port infrastructure across the Gulf region could mean that present supply disruptions last longer than the market is pricing, particularly across the refining industry. Iron ore remains a funder, particularly as Chinese steel demand has shifted towards exports to Asia and the Middle East, both of which are the most impacted by the Strait of Hormuz closure.

While AI advancement has been overshadowed recently, it remains an almost irrepressible theme, with business models continuing to evolve rapidly on a global scale. The thematic nature of recent trading has triggered near-panic in certain stocks, creating attractive entry points. Meanwhile, many other companies possess significant untapped potential through cost-reduction initiatives, productivity gains, and the adoption of new business models. Sage Capital views AI as being a major driver of change and disruption. The focus remains on identifying companies that have powerful moats for regulatory or market structure reasons which can hang on to the productivity benefits, as well as those whose currently competitive positions are at risk of being disrupted.

While the near-term environment remains volatile, it is also one in which a long-short strategy should be well placed to add value. Sage Capital’s objective is not to make large directional bets on macroeconomic outcomes, but to generate returns through specific stock selection while seeking to neutralise as much unpredictable macroeconomic risk as possible. Periods of volatility often create greater dispersion in outcomes across companies, sectors and business models, which can expand the opportunity set on both the long and short side. Sage Capital remains focused on identifying businesses with stronger fundamentals, better management execution and more resilient earnings than the market appreciates, while also seeking to avoid (or short) those where expectations remain too high relative to underlying reality. In Sage Capital’s view, maintaining that discipline is the best way to protect capital, preserve flexibility and position the portfolio to deliver stronger returns as opportunities emerge.

Read the fund reports for additional commentary

• CC Sage Capital Absolute Return Fund monthly report
• CC Sage Capital Equity Plus Fund monthly report

* Past performance is not indicative of future performance. ^ Sage Capital uses a custom grouping system for long and short positions (Defensives, Domestic Cyclicals, Global Cyclicals, Gold, Growth, REITs, Resources and Yield). With a focus on the principal macro earnings drivers for each stock, Sage Groups allow for comparisons to GICS for selecting stocks within a sector.