Performance and market insights - September 2021

Market Insight
October 13, 2021

Finalist - Lonsec Emerging Manager of the Year

We are pleased to be named as a finalist in the Lonsec and SuperRatings Fund of the Year Awards 2021 - Emerging Manager of the year 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 debate continues regarding the critical issue of inflation and whether it is temporary or here to stay. There is continuing evidence globally of labour shortages, rising material costs and when combined with the energy price surge, it makes the prospect of continued higher inflation more likely. The US Federal Reserve has also flagged it will begin tapering later this year, hence we expect bond yields will likely move higher from here.

We are cognisant of the impact of rising bond yields on equity valuations, particularly when coming from such a low starting point. Equities tend to be able to withstand a rising bond yield environment if the increase is simply due to strong economic growth, however, if the increase is more related to monetary policy tinkering as seems be the case now, the outlook for equities and growth stocks in particular is more complex.

Because of the unpredictable nature of various macroeconomic factors, we manage portfolios using Sage Groups, which helps insulate the portfolios from macroeconomic shocks and in the current environment we believe this risk control is more important than ever.

Within the Yield Sage Group, the portfolio currently has long positions in companies with strong earnings outlooks that will likely benefit the most from higher bond yields. Within the Growth Sage Group, the portfolio is positioned long in companies that we believe have strong pricing power, solid growth and reasonable valuations and short companies where we see earnings risk and very stretched valuations. In the Resources Sage Group, we continue to prefer energy related stocks over iron ore as we believe the reduction in Chinese demand for iron ore and the oil supply/demand imbalance will continue for a while longer.

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.