Performance and market insights - February 2021

Market Insight
March 22, 2021

Performance summary

The Sage Capital portfolios produced solid returns in February. The CC Sage Capital Equity Plus Fund delivered a net return of 1.78%* and the CC Sage Capital Absolute Return Fund delivered a net return of 0.54%*, outperforming their respective benchmarks by 0.33% and 0.54%.

Most of the Sage Groups# were positive contributors to performance, the strongest being Global Cyclicals and Resources that were offset somewhat by the underperformance in Domestic Cyclicals.

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

> CC Sage Capital Absolute Return Fund monthly report

> CC Sage Capital Equity Plus Fund monthly report

Within Global Cyclicals, stock selection in the travel stocks, all of which were strong in January due to market enthusiasm around the COVID-19vaccine rollout, drove performance. Long positions in Corporate Travel (CTD +22%) and Flight Centre (FLT +18%) were strong contributors, fundedto some degree by a short position in Qantas whose share price did not rise quite as much (QAN +11%).The Resources group was another strong contributor for the month. The portfolio was positioned slightly overweight to the resources sector as awhole in February given the rebound in global activity. Positive performance was driven by Lynas Rare Earths (+25%), OZ Minerals (+20%), KaroonEnergy (KAR +12%), IGO Limited (IGO +10%) and Nickel Mines (NIC +11%). A short position in Fortescue Metals (FMG + 11%) proved to be areasonable a funding source in the group despite rising. Additionally, a short position in AGL Energy (AGL -18%), which sits in the Defensives group,was a strong contributor.The primary detractor of performance this month was the portfolio’s stock selection within the Domestic Cyclicals group. Our long position in GWAGroup (GWA -12%) impacted as it fell post its result commentary regarding negative mix impacts from its exposure to commercial construction asopposed to renovations and detached housing. Conversely, short positions in Adbri (ABC +13%) and Boral (BLD +7%) negatively impacted as bothstocks bounced with stronger commentary around housing demand.

Market Review

The February earnings reporting season didn’t elicit too many surprises. Retailer profits were strong, particularly those exposed to products relatedto the home, as working from home has materially impacted household spending patterns. Companies in hospitality and travel are still experiencingseverely muted conditions, however the market was prepared to look through shorter term COVID-19 impacts and buy into the recovery andreopening trade following increasingly encouraging results from vaccine rollouts and their efficacy. Conversely, in many cases there was a muted oreven negative response to extremely strong profits for companies viewed as COVID-19 beneficiaries. The market responded positively to earningsbeats in the banking and housing construction sectors. These sectors have been boosted by low rates and support measures, although the marketwas far more willing to capitalise these earnings with likely further upside to the cycle.‍

Market Outlook

Sage Capital has previously written about the risk of a stronger recovery pushing the market out of the goldilocks zone of average growth and verysupportive policy and this started to come to fruition at the end of the month with a rapid steepening in the yield curve. This largely reflects a return ofinflation expectations to pre-pandemic levels, but we also saw real yields begin to tick higher. This move higher in yields has had the effect ofcompressing valuation multiples across the market with some significant underperformance in the growth sector.As the vaccine rollout and economic recovery moves forward there is likely to be a continued rotation towards cyclicals and value. Sage Capitalcontinue to favour companies with strong earnings outlooks and exposure to an economic recovery while remaining cautious on stocks wherevaluations have become stretched or boosted by easy liquidity and speculation. Sage Capital remain broadly neutral across the Sage Groups aftertrimming exposures to commodities with a small overweight to Yield and Defensives funded by underweights in Growth.

* 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.