Performance and market insights - October 2021

Market Insight
November 15, 2021

Winner - Lonsec Emerging Manager of the Year

We are pleased to be named as winner of the Lonsec and SuperRatings Fund of the Year Awards 2021 - Emerging Manager of the year category. As a specialist Australian equities long short manager, this award is testament to the strength of our philosophy, process and team. Our philosophy is based on understanding the key drivers of individual company earnings while controlling for external market risks. Our ongoing success will be defined by our ability to continue delivering strong and consistent returns for our clients.

Performance summary

During the month of October, the CC Sage Capital Absolute Return Fund delivered a net return of 1.66%* and the CC Sage Capital Equity Plus Fund delivered a net return of 0.76%*, outperforming their respective benchmarks by 1.66% and 0.86%. 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 down -0.10% in October, marking the second consecutive negative month. The market was pressured by rising bond yields which climbed for the second month in a row as markets priced in higher inflation and future interest rate hikes. Gold was the strongest Sage Group during the month, up 9%, driven by various positive production updates and heightened corporate activity. The weakest Sage Groups were Defensives (-3%) driven by the sharp fall in Star Entertainment Group, and Resources (-3%) driven by weakness in iron ore exposed companies such as Mineral Resources, Rio Tinto and Fortescue Metals as Chinese steel production continued to moderate off the back of power shortages and production regulations.

Portfolio positioning and outlook

As we move through quarterly reporting and AGM season, we continue to see outlook statements clouded by uncertainties regarding shipping delays and heightened freight costs, shortages of raw materials and labour, and generally rising input costs. The majority of these issues have been driven by Covid-19 disruptions that have coincided with rebounding demand post the pandemic, hence it is still unclear as to whether this is the start of an extended period of inflation or a more temporary issue. However, with labour markets tight and these disruptions likely to last longer than initially expected, we have a preference for companies that either directly benefit, such as a range of resources and cyclicals, or are able to pass through input price pressures and maintain or expand margins.

Central banks are finally starting to take notice and adjust policy. The US Federal Reserve has begun tapering its asset purchases while central banks from New Zealand to Norway and Eastern Europe have raised rates and the RBA has abandoned its efforts at yield curve control. This could be the beginning of the end for a bull market that has been fueled by extraordinary liquidity injections stemming from fears of an economic armageddon driven by Covid-19. In any case, the prospect of rising interest rates sees us favour companies that will benefit from such a situation like insurers who have significant short term investment balances.

As always, the portfolios are well diversified and we remain relatively neutral across the Sage Groups which allows the portfolio to be well insulated from systematic macro risks such as higher than expected inflation, while benefiting from bottom-up 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.