Performance and market insights - August 2021

Market Insight
September 15, 2021

Thank you for your support over the last two years

Sage Capital’s strategies reached their two year track record this month, in what has been an incredible two years of illustrating the merits of a style and cycle neutral investment process - with a particular focus on robust and tight risk control.

None of us could have predicted how the world would change over such a short period of time. The increasing dominance of passive and ETF flows, lockdown impacts, and reduced earnings visibility is creating a great environment for highly active managers.

Identifying cyclical and structural changes is more important the ever. Wild macro swings, and changes to fiscal and monetary policy highlight the need to stay relatively style and sector neutral.

Finalist - Zenith Fund Awards 2021

We are pleased to be named as a finalist in the Zenith Fund Awards 2021 - Rising Star category. The nomination is testament to the strength of our investment philosophy, process and team, which employs a blend of quantitative analysis and fundamental research which combined facilitates the opportunity to generate multiple sources of alpha for our investors.

Performance summary

For the month of August, the CC Sage Capital Absolute Return Fund delivered a net return of 2.78%* and the CC Sage Capital Equity Plus Fund delivered a net return of 3.80%*, outperforming their respective benchmarks by 2.78% and 1.30%. Both portfolios remained relatively neutral across the Sage Groups# allowing each strategy to be well insulated from unexpected systematic macro risks while benefiting from stock selection.

The S&P/ASX 200 Accumulation Index finished up 2.50% in August with company results dominating news flow. Profit growth overall was strong and outlook statements were generally cautious. Key business and consumer confidence indicators weakened due to uncertainty over the impact of the Covid-19 Delta strain and recent lockdowns. Consumer discretionary and insurance companies delivered stronger than expected results however share price moves generally reflected a sell-off in Covid-19 winners and a rebound in Covid-19 recovery stocks.

M&A featured strongly, notable Afterpay (APT +39%) - being taken over by US payments company Square for $39 billion, Australia’s largest ever M&A deal. Global bond yields retraced on moderating inflation expectations with the US bond yield falling 21 basis points though the Australian 10-year bond yield was flat, likely due to recent lockdowns.

Growth (+10%) was the strongest performing Sage Group followed by REITs (+6%) and Defensives (+5%) with Resources (-9%) driven by the lower iron ore price and Gold (-5%) as inflation expectations eased.

Portfolio positioning and outlook

The Australian economy continues to be impacted by lockdowns and with the consumer more supported than stimulated by government spending in this round of lockdowns, consumer discretionary company earnings will suffer for the first half of fiscal 2022. More broadly, reporting season provided further evidence of inflationary pressures coming through in the form of increased costs of freight, insurance premiums, labour and raw materials. We believe these issues will persist in the near term and continue to favour companies with strong pricing power. In this context, we remain long insurers with the pricing power to drive premiums higher. We remain comfortable with short positions in iron ore stocks as Chinese demand softens due to curbing its steel production and we remain long lithium exposed stocks, as the transition to the green economy accelerates as evidenced by US President Joe Biden’s target to have 50% of new vehicles electric by 2030.

Overall equity returns and the economic outlook continue to be inextricably linked to the trajectory of Covid-19, vaccination rollout and the resulting direction of bond yields. We are confident in the outlook for company earnings however it is likely that we have seen most of the economic rebound now and with the Covid-19 Delta strain looking to have peaked globally. We believe the US Federal Reserve may begin tapering its bond purchases later in the year which may put pressure on valuations in some sectors of the market.

As always, we remain relatively neutral across the Sage Groups which allows the portfolio to be well insulated from unexpected systematic macro risks while benefiting from stock selection.

View our monthly reports below for additional commentary around performance, market review, portfolio positioning and outlook.

* Past performance is not indicative of future performance. ^ Sage Capital uses a custom grouping system for long 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.