Lonsec has acknowledged Sage Capital for its very strong conviction in its investment approach. This acknowledgment underscores the strength of its philosophy and process, built over two decades by Chief Investment Officer, Sean Fenton. Since the inception of the strategies in August 2019, Sage Capital’s investment team has consistently achieved its performance objectives, demonstrating resilience across various market conditions.

Managing Director and Chief Investment Officer, Sean Fenton said, “This independent endorsement further validates the strength and cohesion of our investment team, as well as the robustness of our investment process.”

“The strategies are designed to generate alpha over the long term through our unique investment approach that combines fundamental and quantitative analysis. We seek to provide a solution for investors to help lower correlation to equity markets by holding both long and short positions – in a risk-controlled way.”

As a market neutral long short strategy, CC Sage Capital Absolute Return Fund is designed as an alternative’s allocation, providing exposure to Sage Capital’s stock selection and risk management framework, whilst eliminating overall exposure to the underlying equity market. Since inception to 31 July 2023, the fund has returned +9.75% pa^ net of fees, outperforming its benchmark (RBA Cash Rate) by 8.75% pa. This has been achieved with no correlation to the S&P/ASX200 Accumulation Index and with less than half of the volatility, thus providing investors with clear portfolio diversification benefits.

CC Sage Capital Equity Plus Fund is designed as an Australian equities allocation targeting a constant beta of one and benchmarked to the S&P/ASX200 Accumulation Index. Since inception to 31 July 2023, the fund has returned +12.45% pa^[1] net of fees versus the S&P/ASX200 Accumulation Index return of 7.13% pa, an outperformance of 5.32% pa^[1] net of fees.

“In the current volatile market environment, employing a long short strategy may prove to be a good additional diversifier of long-only Australian equities exposures. Our ability to short companies removes the constraint around index weights. The distribution of weights across the index becomes irrelevant and we have the freedom to choose portfolio weights for stocks that are independent of the index weight, subject only to liquidity. A long short portfolio can achieve active return targets with a far more diversified portfolio of stocks. The greater diversification resulting from this can mean a better risk/reward trade-off and potentially more consistent returns to investors over time.” Mr Fenton said.

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[1] Past performance is not indicative of future performance. Fund inception date was 20 August 2019.

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Sean Fenton

Sage Capital’s highly successful two long short strategies have reached their three-year track record, with its market neutral strategy achieving top quartile status globally^[1] since inception.

As a result, Sage Capital has been able to build a broad and diversified base of both domestic and high-profile international clients across institutional, not-for-profit and charities, endowment, family office, private bank, retail and wholesale sectors via its partner, Channel Capital.

The Sage Capital strategies intentionally provide investors with two style neutral portfolio solutions. Firstly, an alternatives solution (CC Sage Capital Absolute Return Fund), and secondly, an Australian equity solution (CC Sage Capital Equity Plus Fund), both of which rely on the same investment process built over 20 years by Chief Investment Officer, Sean Fenton, through his successful career as a long short investor.

As a market neutral long short strategy, the CC Sage Capital Absolute Return Fund is specifically designed as an alternative’s allocation, providing exposure to Sage Capital’s stock selection and risk management framework, whilst eliminating overall exposure to the underlying equity market. For the three years to 31 August 2022, the CC Sage Capital Absolute Return Fund returned +11.51% pa^[2] net of fees, outperforming its benchmark (RBA Cash Rate) by +11.21% pa. This has been achieved with no correlation to the S&P/ASX200 Accumulation Index and with less than half of the volatility, thus providing investors with clear portfolio diversification benefits. The fund has achieved ‘top quartile’ status within the global market neutral universe since inception on 20 August 2019 to 30 June 2022 (according to eVestment^[3]).

As an active extension long short strategy, the CC Sage Capital Equity Plus Fund is specifically designed as an Australian equities allocation targeting a constant beta of one and benchmarked to the S&P/ASX200 Accumulation Index. For the three years to 31 August 2022, the CC Sage Capital Equity Plus Fund returned +12.14% pa^[4] net of fees versus the S&P/ASX200 Accumulation Index return of +5.51% pa, an outperformance of +6.63% pa^[5] net of fees.

Managing Director and Chief Investment Officer, Sean Fenton said, “At a time when asset correlation is being significantly questioned amid market falls, liquid alternatives such as market neutral can help diffuse market risk and provide a source of uncorrelated returns to other assets. These strategies offer potential alpha opportunity for many long-only investors seeking to diversify away from traditional equity and fixed income allocations. These factors as well as the ongoing search for yield and stable return streams are driving investor appetite.

Considering the increase in market volatility over the past year, the funds have performed well − achieved by applying our broad and style neutral investment process. We categorise the market into eight proprietary Sage groups and focus on selecting stocks within them, to give us the flexibility to incorporate rapidly shifting company information into the portfolio without taking large binary style positions. Performance has been driven by strong stock selection within these Sage groups which include Defensives, Domestic Cyclicals, Global Cyclicals, Gold, Growth, REITs, Resources and Yield,” Mr Fenton said.

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[1] Source: eVestment©. Relative value − Market Equity Neutral Universe. End-of-month risk and return characteristics from August 2019 to June 2022.
[2] Past performance is not indicative of future performance.
[3] Source: eVestment©. Relative value − Market Equity Neutral Universe. End-of-month risk and return characteristics from August 2019 to June 2022.
[4] Past performance is not indicative of future performance.
[5] Ibid.

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The team from Channel Capital.

The CC Sage Capital Absolute Return Fund (the Fund) managed by specialist Australian equities long short manager, Sage Capital, has been added to investment platform Macquarie Wrap, broadening access to the absolute return strategy.

The Fund, which launched in August 2019, is a market neutral long short strategy where short positions and long positions offset each other, giving investors exposure to Sage Capital’s stock selection skills while eliminating exposure to the underlying equity market. The objective of the Fund is to achieve positive returns in excess of the RBA Cash Rate after fees and expenses over the long term by taking both long and short positions in selected Australian shares. The Fund will typically hold between 100-120 positions.

Managing Director and Chief Investment Officer Sean Fenton said: “The Fund has performed well over the past year, achieved by applying our broad and style neutral investment process. We categorise the market into eight broad Sage groups and focus on selecting stocks within them. This gives us the flexibility to incorporate rapidly shifting company information into the portfolio without taking large binary style positions. Performance has been driven by strong stock selection within these Sage groups which include Defensives, Domestic Cyclicals, Global Cyclicals, Gold, Growth, REITs, Resources and Yield.” 

The Fund has performed well since inception on 20 August 2019 to 30 April 2021, delivering a net return of 11.52% pa* with significantly lower volatility than broader equity indices and no correlation (slightly negative) to equity markets. The Fund aims to deliver consistent positive returns above the RBA Cash Rate, irrespective of equity market movements.

Backed and supported by boutique incubator Channel Capital, Sage Capital was formed in June 2019 and is 100% owned by its investment team. The Fund is open for investment and may be suitable for investors looking for an alternative to traditional asset classes such as equities, bonds or cash, but is still highly liquid.

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*Past performance is not indicative of future performance.

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Lonsec noted the strength of the investment process, which differs from peers by employing a blend of quantitative analysis and fundamental research which combined, facilitates the opportunity to generate multiple sources of alpha, through a highly collegiate investment team.

The CC Sage Capital Equity Plus Fund is an active extension long/short strategy that takes both long and short positions where the proceeds from the short positions are reinvested in long positions to retain exposure to the equity market and typically holds between 100-120 positions. Since inception on 20 August 2019, the CC Sage Capital Equity Plus Fund has delivered 4.41% p.a. net of fees to 31 August 2020, outperforming its benchmark (S&P/ASX200 Accumulation Index) by 8.20% p.a.

The CC Sage Capital Absolute Return Fund is a market neutral or absolute return strategy where short positions and long positions offset each other, giving investors exposure to Sage Capital’s stock selection skills while eliminating exposure to the underlying equity market, and typically holds between 100-120 positions. Since the launch on 20 August 2019, the CC Sage Capital Absolute Return Fund has delivered 13.05% p.a. net of fees to 31 August 2020, outperforming its benchmark (RBA Cash Rate) by 12.54% p.a.

Sage Capital’s commitment to responsible investment has also been recognised. Its integration of ESG within the investment process was stronger relative to peers in the Active Extension and Alternatives sectors.

Managing Director and Chief Investment Officer Sean Fenton said “this independent endorsement further validates the strength and cohesion of our experienced investment team, as well as the robustness of our investment process − evidenced by both Sage Capital funds achieving their performance objectives, since inception in August 2019.

It provides investors with broader access to long/short strategies that may prove to be a good additional diversifier of long-only Australian equities exposures in the current volatile market environment. Our ability to short companies removes the constraint around index weights. The distribution of weights across the index becomes irrelevant and our stock selection process gives us the freedom to select portfolio weights for stocks that are independent of the index weight, subject only to liquidity. The greater diversification resulting from this can mean a better risk/reward trade-off and potentially more consistent returns for investors over time.” Mr Fenton said.

Backed and supported by boutique incubator Channel Capital, Sage Capital was formed in June 2019 and is 100% owned by its investment team. Both Funds received a recommended rating from Zenith Investment Partners in February this year.

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Sean Fenton

The CC Sage Capital Equity Plus Fund managed by specialist Australian equities long/short manager Sage Capital has been added to Macquarie Investment Manager/Consolidator, Macquarie Super Manager/Consolidator as well as HUB24, Mason Stevens and Praemium, broadening access to the Australian equity active extension strategy.

The CC Sage Capital Equity Plus Fund is an active extension, long/short strategy that takes both long and short positions where the proceeds from the short positions are reinvested in long positions to retain exposure to the equity market and typically holds between 100-120 positions. Since inception in August 2019, the CC Sage Capital Equity Plus Fund has delivered 1.72% net of fees to 31 July 2020, outperforming its benchmark (S&P/ASX200 Accumulation Index) by 8.27%.

Managing Director and Chief Investment Officer Sean Fenton said “We have a liquid, diverse portfolio and are focused on a repeatable investment process that we expect to consistently generate returns through time, including through volatile markets such as those we are currently experiencing. The Fund provides a solution for investors who are seeking an enhanced exposure to the equity market, and we do this by holding both long and short positions – in a risk-controlled way.”

In the current volatile market environment, many investors are looking for ways to diversify risk in their portfolio. Employing a long/short strategy may prove to be a good additional diversifier of long-only Australian equities exposures. For investors with a core passive allocation, the strategy could also be a potentially higher returning alternative.

“Our ability to short companies removes the constraint around index weights. The distribution of weights across the index becomes irrelevant and we have the freedom to choose portfolio weights for stocks that are independent of the index weight, subject only to liquidity. A long/short portfolio can achieve active return targets with a far more diversified portfolio of stocks. The greater diversification resulting from this can mean a better risk/reward trade-off and potentially more consistent returns to investors over time.” Mr Fenton said.

Backed and supported by boutique incubator Channel Capital, Sage Capital was formed in June 2019 and is 100% owned by its investment team. The CC Sage Capital Equity Plus Fund is open for investment and may suit investors with a medium to long term investment horizon and who seek to complement existing long-only Australian equities portfolio exposures.

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Sean Fenton

It hardly seems like a few of weeks ago that we were considering the imminent spread of COVID-19 outside of China and to the rest of the world.

While the reaction of investors, households, corporates and governments was hard to predict, one thing that was predictable was the exponential growth in virus cases outside of China. This was because governments had barely taken steps to slow the virus, outside of shutting down travel from China where it was largely contained, let alone effectively test for it. The exponential growth that we were observing in new cases at the start of the month has continued. The number of new cases at the start of the month barely registers on the chart, highlighting the impact of that exponential growth.

Governments around the world have announced a variety of social distancing measures, ranging from the banning of mass gatherings and restrictions on inbound travel to a complete lockdown of the country in line with Wuhan. The experience in Wuhan shows that drastic social distancing measures are effective in containing the spread of the virus, but it will be at least a week before we see any moderation in cases numbers. This is for countries such as Italy, France and Spain that have moved to complete lockdown. It is less clear how the more measured approaches seen in Australia, the US and many other parts of the world will slow the spread of the virus, although these countries are rapidly increasing their responses.

Feeling the economic cost

As we foreshadowed a few weeks ago, governments are now facing the difficult choice of balancing an overwhelmed healthcare system and a significant loss of life, with significant disruption to the economy and a recession. Not surprisingly, governments have reacted to increasing infection and death rates by progressively restricting human interactions, which has a huge economic cost. Many parts of the travel, tourism and education industries are plunging into deep recession. The flow on effects to the economy through weaker employment, income and aggregate demand will also be material. The only exception to this trend has been in the UK briefly, and the Netherlands where they’ve looked to keep the economy running and isolate the most at risk group, being over 70’s. This approach may be the best in theory, but is higher risk and could lead to sharply higher death rates if ‘at risk’ groups aren’t effectively isolated.

There is still some hope for a way through this crisis. Containing the virus quickly, developing effective treatments and keeping people employed will be key to a good outcome. Some of the panic around the world, as well as social distancing measures introduced by governments, will help to slow or even contain the virus. Governments have been a little slow to act, but in reality, have done as well as could be expected. They’ve also acted early in recognising the need for fiscal stimulus to support the economy and jobs while central banks have moved to aggressively cut to near zero where they were still positive. Moving out of lockdown and back to normality as quickly as possible will be key to limiting the collateral damage to the economy.

Economic risks mounting with signs of credit stress

We are not optimistic about a positive outcome though. While governments are taking strong action to contain the virus, risks to the economy are now also mounting exponentially. Shutting down industries such as tourism, travel, restaurants, bars, conferences, education and others will have a significant impact on employment. This then feeds through the economy in the form of lower income, consumption and aggregate demand. Small businesses start closing and credit defaults go up, threatening the stability of the financial system. Interest rate cuts and Quantitative Easing (QE) can do nothing to prevent this. Fiscal stimulus will benefit, but the extent of the problem is at least an order of magnitude beyond what has already been announced. Bank funding for small business sounds like a good idea, but are banks really going to write unsecured loans to small businesses facing insolvency? If so, do you really want to be a bank shareholder? At some stage, politicians are going to need to make some tough calls about the level of coronavirus deaths that will be tolerated. These stresses in the financial system are already apparent as US investment grade credit spreads move back up to levels not seen since the GFC.

Another area of curiosity in markets is the reaction of the bond market. While the equity market has cratered, bond yields have reversed course and started moving higher. Given policy rate cuts to near zero, this has steepened yield curves in the US and elsewhere. The following chart shows that US yield curves inverted and then steadily steepened leading into and through the GFC.

We are seeing a similar steepening of the curve now, but in this case 10-year treasuries yields are actually rising, whilst they were still falling right through the previous steepening cycle until the end of 2008. This was just before the bottom of the equity market as well. Cash rates were coming from much higher levels, so the yield curve was steepening as the Federal Reserve cut interest rates rapidly and moved to a more accommodative policy position. The short end simply fell faster than the long end. The current case of the short end falling towards zero and the long end starting to rise is more difficult to interpret.

This could simply reflect the bond market being more sanguine about the economy in the longer term and pricing in a recovery of activity down the track. While the bond market moves in different directions to equities at times, this seems a little optimistic given that the world is facing an unprecedented economic shock. Real yields, as measured by inflation linked US treasuries have also shot higher.

Lessons in liquidity risk

This seems more consistent with what we saw during the depths of the GFC following the collapse of Lehman Brothers where markets became dysfunctional. Liquidity pressures saw all asset values fall. Central banks seem to be on top of liquidity measures though, freely pumping hundreds of billions of dollars into the financial system so something else may be at play. Another possibility is that central banks have given up on yield curve control. There had been a belated acknowledgement that flattening yield curves and crunching the profitability of the financial sector was perhaps not the most stimulatory policy tool. Efforts certainly seem more concentrated at the short end to date. Another possibility is that the bond market is pricing in the huge wave of government bond issuance that will be required to finance the enormous deficits that are going to blow out all around the world as governments grapple with the economic shock of locking down economies. Resistance to deficit spending certainly seems to have evaporated and calls for modern monetary theory style policy of direct deficit monetisation will only grow.

While it’s difficult to be definitive about what is driving the bond market, it has significant implications for the style of recovery we experience. If this is a temporary dislocation and bond yields all head back to zero as the recovery occurs in a broad low inflation environment, then high quality growth stocks are likely to perform well on the rebound. However, if there is an increasing amount of fiscal stimulus financed by central banks then the world could emerge into a high inflation environment. This could see gold, commodities and leveraged cyclicals be the best performers. A lot depends on the success of containment measures, the evolution of the virus, length of lockdowns and government and central bank responses. Needless to say, we see the world moving into recession, the only question remains as to its duration.

Portfolio positioning in turbulent times

Both of the Sage Capital funds have performed well compared to their benchmarks in the current environment with the CC Sage Capital Absolute Return Fund delivering significant positive returns, uncorrelated with equity markets. This has been achieved by moving quickly to a defensive positioning in the portfolio with an early recognition of the spread of COVID-19 outside of China and the economic and financial impact of shutdown measures that were likely to be used to combat it.

We have been broadly underweight stocks with direct travel and tourism exposure as well as those with financial leverage or exposure to falling cash rates. We have maintained overweights across healthcare, consumer staples and telecommunications where we have some confidence in the ability of companies to maintain or grow profitability.

This strategy has been very successful to date, but there is now an extreme divergence in relative performance as well as an explosion in underlying volatility in the market. We’re focused on controlling this risk and have been steadily cutting gross exposure and locking in some profits in the portfolios.

While we remain defensively positioned, we are also thinking about the shape of the recovery when it comes and see a lot of opportunity to benefit from this. We are currently in the grips of panic and there are likely some dark days ahead, but we have complete confidence in the ability of the human species to adapt and persevere. These challenges will eventually be overcome and another bull market lies ahead of us.

By Sean Fenton, CIO

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Sean Fenton

Both the CC Sage Capital Equity Plus Fund and the CC Sage Capital Absolute Return Fund have received a ‘recommended’ rating from Zenith Investment Partners.

The CC Sage Capital Equity Plus Fund is an active extension long/short strategy that takes both long and short positions where the proceeds from the short positions are reinvested in long positions to retain exposure to the equity market and typically holds between 100-120 positions. Since the launch in August 2019, the CC Sage Capital Equity Plus Fund has delivered 5.27% net of fees to 31 December 2019, outperforming its benchmark (S&P/ASX200 Accumulation Index) by 1.47%.

The CC Sage Capital Absolute Return Fund is a market neutral or absolute return strategy where short positions and long positions offset each other, giving investors exposure to Sage Capital’s stock selection skills while eliminating exposure to the underlying equity market, and typically holds between 100-120 positions. Since the launch in August 2019, the CC Sage Capital Absolute Return Fund has delivered 1.94% net of fees to 31 December 2019, outperforming its benchmark (RBA Cash Rate) by 1.63%.

Managing Director and Chief Investment Officer Sean Fenton said “The strategies are designed to generate alpha over the long term through our investment approach that uniquely combines fundamental and quantitative analysis. We seek to provide a solution for investors to help lower correlation to equity markets by holding both long and short positions – in a risk-controlled way.”

In its research report Zenith noted the confidence it has in the Sage Capital investment team and its long-standing investment process to deliver upon each of the Funds’ investment objectives. In particular, the way in which Sage Capital targets an equal contribution to active risk arising from the quantitative and fundamental process. The two processes are conducted independently to ensure that biases are not introduced into either process. Overall, Zenith believes the blended quantitative and fundamental processes are complementary.

“This independent endorsement further validates the strength and cohesion of our experienced investment team, as well as the robustness of our investment process − evidenced by both Sage Capital funds achieving their performance objectives, since inception.

In the current volatile market environment, employing a long/short strategy may prove to be a good additional diversifier of long-only Australian equities exposures. Our ability to short companies removes the constraint around index weights. The distribution of weights across the index becomes irrelevant and we have the freedom to choose portfolio weights for stocks that are independent of the index weight, subject only to liquidity. A long/short portfolio can achieve active return targets with a far more diversified portfolio of stocks. The greater diversification resulting from this can mean a better risk/reward trade-off and potentially more consistent returns to investors over time.” Mr Fenton said.

Backed and supported by boutique incubator Channel Capital, Sage Capital was formed in June 2019 and is 100% owned by its investment team. Both Funds are open for investment and may suit investors with a medium to long term investment horizon and who seek to complement existing long-only Australian equities portfolio exposures.

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Sean Fenton

Sean Fenton, one of Australia’s most experienced Australian equities long/short managers has announced the establishment of Sage Capital – an investment management boutique bringing to life Mr Fenton’s vision for a contemporary and specialised firm, which seeks to generate alpha over the long term through its unique investment approach combining fundamental and quantitative analysis.

Sage Capital is backed and supported by institutional-focused boutique incubator Channel Capital.  Channel is providing the full suite of investment services, including distribution and Responsible Entity services through its incubation platform.

The boutique is wholly owned by its directors and staff – four highly credentialed and experienced portfolio managers – Kelli Meagher, Peter Moore and James Delaney, who have all worked with Mr Fenton throughout his portfolio management career. Sage Capital’s two initial funds are also open for investment – the CC Sage Capital Equity Plus Fund, an Australian equities long/short strategy and the CC Sage Capital Absolute Return Fund, an absolute return strategy, both issued by Channel Investment Management Limited (a subsidiary of Channel Capital) as Responsible Entity.

Managing Director, Sean Fenton said “The formation of our firm marks the continuation of the investment management style that our team and I have been running over many years, with the dedication and discipline that is required to actively manage equities portfolios in today’s complex market environment. We seek to provide a solution for investors to help lower correlation to equity markets by holding both long and short positions – in a very risk controlled way.

Mr Fenton adds “Our differentiated stock selection process utilises two complementary sources of return, employing both a quantitative and a fundamental process. The objective of this process is to identify companies that will deliver superior earnings outcomes on an attractive risk/reward basis.  Diversification is a key attribute of the portfolio construction process and a suite of sophisticated risk management tools are employed to ensure that the impact of unexpected risks is minimised.

Long/short strategies have gained in popularity over the years as Australian investors have become more comfortable with strategies that involve short selling. The different structures can meet the needs of investor portfolios that allocate to equities for long term income and growth potential or given heightened market volatility and the need for capital protection and yield, provide a source of uncorrelated returns to the equity market.” he said.

Channel Capital’s Managing Director, Glen Holding said “We spend a great deal of time searching for differentiated investment teams of the highest quality, and we are pleased to have launched Sage Capital with Sean Fenton and his colleagues. The Sage Capital long/short strategies offer our clients investment options which provide diversification and the potential for uncorrelated returns within their portfolios.”

Both funds are open for investment and may suit investors with a medium to long term investment horizon and who seek to complement existing long-only Australian equities portfolio exposures.

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