Performance and market insights - December 2020

Market Insight
January 18, 2021

Performance summary

As a market neutral strategy that aims to provide an uncorrelated source of returns whilst eliminating equity market exposure, the CC Sage Capital Absolute Return Fund returned -0.21% after fees, underperforming the RBA Cash Rate by -0.21% during the month. Over 1 year, the Absolute Return Fund has returned 11.33% after fees, outperforming it’s benchmark by 11.08%. Since inception, the Absolute Return Fund has returned 9.70% p.a. after fees and outperformed its benchmark by 9.30% p.a.*

As an active extension strategy that aims to always retain exposure to equity markets, the CC Sage Capital Equity Plus Fund returned 1.01% after fees, underperforming the S&P/ASX200 Accumulation Index by -0.20% during the month. Over 1 year, the Equity Plus Fund has returned 8.56% after fees outperforming it’s benchmark by 7.16%. Since inception, the Equity Plus Fund has returned 10.26% p.a. after fees and outperformed its benchmark by 6.44% p.a.*

Market review

The S&P/ASX 200 Accumulation Index rose by 1.20% during the month, trading in a tight range relative to recent volatility. There was broad consolidation of the COVID-19 vaccine induced cyclical rotation, but the market lacked a clear direction or a catalyst outside of easy money.

The best performing Sage Groups~ across the market were Resources and REITs, while the other Sage Groups were negative, including Global Cyclicals, Growth, Gold, Defensives, Yield and Domestic Cyclicals.

Portfolio positioning and outlook

Even as vaccine roll-outs began, Covid-19 continued to induce lockdowns throughout much of the world and new virus variants reported in South Africa and the UK are causing alarm. Meanwhile in Australia, state border openings have remained short-lived as an outbreak in Sydney caused some localised lock-downs and many people were forced to cancel Christmas plans. Tensions between China and Australia continued to escalate although this has had no impact on the Iron Ore trade – by far the most significant export to China.

Markets continued to be positive on reflation and economic recovery – looking forward to the end of coronavirus and some political risks removed with a Brexit deal finalised and an incoming Biden administration. However, after a record breaking return and aggressive value rotation in November, the market took somewhat of a breather and outside of Resources, many of November’s most bought stocks underperformed.

The near term outlook for the global economy remains challenged, with COVID-19 outbreaks emerging in countries where the virus was previously under control, including Australia and uncontrolled spread through much of the Northern Hemisphere. Meanwhile, new COVID-19 concerns came from the UK and South Africa where mutated forms of the virus appear to be far more infectious. Nonetheless, vaccine roll-outs are gaining pace, currently underway across Europe and North America and are due to begin in Australia from February. The market is likely to continue to look through these short term challenges with a resolution firmly in sight and plenty of monetary and fiscal support along the way. The investment team see the potential for earnings recovery for a wide range of companies impacted by lockdowns, although share prices for many have now recovered to levels where the risk reward prospects are marginal.

As at the date of writing in early January, the Democrats have gained control of the US Senate, with the prospect of a pro-fiscal government leading to higher US and global economic growth as well as higher bond yields. 10 year bond yields have pushed above 1% in the US and Australia and implied inflation expectations have moved above 2% in the US for the first time since 2018. This is being driven by global fiscal deficits that are being monetised by central banks and is also showing up in commodity markets. Financial flows are driving commodity prices higher across the board, which has seen strong outperformance by Resources companies. We have been increasing our overweight to this sector as an inflation hedge, but also with positive leverage to both economic recovery and financial flows.

The prospects of economic recovery have provided some challenges to the leadership of technology and growth within the market, but the likelihood of central banks allowing inflation to run hot and keeping real yields deeply negative is high. Many growth companies continue to find buying support, even as bond yields move higher, but there are some clear elements of speculative excess emerging in the market. This is perhaps best exemplified by the surge in Bitcoin to new highs or the meteoric rise of Tesla, along with the mania developing around new IPO’s. It is difficult to be decisive on when this may all end, so we maintain a preference for growth companies with strong earnings track records and the ability to continue to surprise on the upside.

Looking forward to reporting season we are likely to see some strong results from discretionary retail and consumer staples as people continue to spend more on goods, particularly around the home. We have been increasing our exposure to these companies, and while there may be an element of over earning, this has rarely been capitalised into share prices.

* Past performance is not an indicative of future performance. The inception date of the CC Sage Capital Absolute Return Fund and the CC Sage Capital Equity Plus Fund is 20 August 2019.

~Sage Capital uses a custom grouping system for long short positions including Defensives, Domestic Cyclicals, Global Cyclicals, Gold, Growth, REITs, Resources and Yield.