Sage Capital — A long/short equity fund manager

Our next speaker is Sam Rose from Channel Capital.

Sam is a director at Channel Capital, responsible for managing client relations.

One of Channel Capital's fund managers is Sage Capital.

Sage are an Australian equity long-shot manager with over $1 billion in funds under management.

Sage utilized a unique half quantitative, half fundamental investment process developed over the past 26 years to generate consistent returns for investors.

They have been one of the top performing long short funds in the country, delivering 13.5% per annum.

Sam's topic today is Sage Capital, a longshore equity fund manager.

Welcome to the stage, Sam.

Thanks, Angela.

Just share my screen now for everyone to see.

that comes up on the screen.

So thank you very much for having us on today and being part of the first ever investment markets conference.

So you've got a great list of managers across the variety of asset classes.

So it's great to be a part of it and thanks again for the introduction.

What I wanted to really touch on today and provide a brief introduction was on long short investing, particularly in the Australian market where our partner Sage Capital,

run their portfolio.

Look, just to touch base on long-short as a strategy as a whole, there's two clear advantages or propositions as to why you look at long-short strategies as part of your wider portfolio.

The first one is diversification.

Obviously, a lot of people have exposure to direct Aussie shares that they've owned for a number of years or

traditional long only funds, but having a long short structure, particularly in the current volatile environment can provide excess returns.

And the reason they can provide those excess or additional returns is through the ability of shorting stocks and making money from underperformers in the market, as well as backing those good, consistent growing companies on the long side of the portfolio.

Secondly, because of that, we can be more diversified.

So we can look at a range of stocks across the market.

In Sage's case, that's in the ASX 200, but even in a global context, looking at the best and worst performers in a portfolio.

Now, look, just turning to Sage, Angelina did a good introduction, but just to touch on Sage Capital is

100% independent investment manager based in Sydney.

The business has been around for just over three and a half years, but the team actually ran the exact same strategy at another firm for over a decade, consistently being a top quartile, top performer in the marketplace over a decade, delivering consistent alpha over the ASX 200 benchmark.

and being quite successful, but they've taken that strategy into more of a aligned boutique business and channel capital work with them on the client relationships, as well as all the back office work required to run a funds management business to let Sean and the team manage the portfolio and do what they do best, which is picking stocks and investing.

So the team here led by Sean Fenton, he's worked with the other colleagues at the previous firm for over 10 years.

And they've developed this strategy which combines both quantitative investing as well as fundamental investing to put together a portfolio of long short.

And fundamentally what Sage believe in their investing is that

The primary source of returns comes from company earnings over the long term.

So you want to be investing in those companies delivering that consistent earning growth year in year out.

but also incorporating, there's many factors that affect the market.

We've seen lately, whether it's higher interest rates rising rapidly, Ukraine, Russia, conflict, inflation, COVID, whatever it is.

So you need to overlay that fundamental investing with a risk control process and a quantitative model to basically help deliver more consistent long-term returns.

And we do that

via a long-short product where we believe is the best way to invest and profit from both positive and negative stocks in a diversified fashion.

So just moving to how we select stocks in the portfolio.

Now, generally, when you think about the ASX market, you think of the sectors, which what we do is take those sectors, but slightly tilt them into what we call sage groups.

And we do that because we find there's a number of stocks that have high correlations and actually try quite similar to each other.

actually work better if they're grouped together, which we'll get into in a second.

Once we break the market into those groups, we then rate each stock, return prospects via a quantitative model, which takes into account things like momentum, quality and value factors.

So similar to Pella's presentation before, we don't try and stick to one style, whether it's more growthy tech stocks, high PE stocks, or deep discounted value stocks, we tend to try and pick the best stocks across variety of the market.

And we generally blend that in a way that we think is going to deliver more consistent returns.

We then look at the fundamental research and really doing a deep dive into the company structure, the financials evaluation piece to any ESG factors to really identify those high conviction ideas.

We then combine them and really have a portfolio of about 100 active positions.

So it is quite diversified across both long and short.

So there are groups there, I'll get into them in a second here.

So what we're trying to do and what I guess Sage is a bit different is, when you look at the market in the Australian landscape in the ASX,

is we try and strip out things like gold from resources.

Gold stocks tend to trade a lot more defensively than some of the resource names like copper or iron ore stocks, and also growth.

So growth could include high PE stocks like Domino's Pizza, REA Group,

but also healthcare names like CSL or even aristocrat leisure.

So we tend to group them together because we tend to think that works better when we're analysing stocks and how they trade and how correlated they are, particularly in down markets.

So what we do is when we get the SAGE groups, we look at within those groups, so such as the yield group, we might be, we've been short things like Westpac at the moment.

We think the banks are under a bit of pressure from housing market, slowing down, fixed rate mortgages rolling off.

And their earnings outlooks are looking a bit weaker.

And we're long companies like QBE and Suncorp at the moment that have benefited from rising rates and bond yields.

They've got a lot of cash on their balance sheet.

and we see some earnings upgrades there.

On the resources space, we've been slightly short some of the iron ore names with the China property market issues, slower steel demand, and long more the copper and base metals that are benefiting from the transition to net zero and the demand for those materials, as well as some of the oil names like Santos.

We see the underinvestment in refineries and oil as consistent demand for those companies.

But what's really important to look at this side is that net weighting, that middle to dark black line shows we're not taking big style bets on certain sectors.

So we're not relying on resources or gold or whatever cyclicals to do really well.

It's really blended across the whole market that creates that diversity and that consistent

returns across the whole market, not relying on certain sectors to generate all our returns.

And it also helps on the downside risk to not be too leveraged to certain bets across the market.

That's an existing example where we could be short Bendigo Bank and Long Credit Corp.

This is a trade that we had last year, worked quite well, and it sort of blends both our quantitative and fundamental analysis together in that trade.

We also look at running quite tight risk controls regarding the portfolio.

So once we've sort of developed our best and worst positions across those groups, we also look at liquidity, concentration risk, how limit our individual stock size as well and trading positions.

So we don't want to be too leveraged to, to certain stocks to drive all our returns.

Um, and we, and that seemed to work well, particularly during the down markets that we've had in the last couple of years.

And probably just moving lastly to performance.

So as you can see from the chart there, the portfolio since inception in August 2019 has really done a great job of delivering consistent outperformance versus the ASX 200.

And that's over basically every timeframe, as you can see.

We really do believe this is from a combination of the team's very strong track record in investing in longshore equities and the process developed over the last 25 years from Sean and the team's experience, blending that quantitative and fundamental process in a real style, neutral,

investment philosophy.

So as I said earlier, not taking big bets on certain growth stocks or value or, or anything like that.

It really is a blend across the whole market and just looking for those best and worst companies.

Also, we're not going too big on any individual stocks.

So our maximum exposures are about 5% per stock.

So again, not taking big bets on certain stocks.

And just lastly, just wanted to touch on the alpha that we've generated has really come down to the investment team's ability to pick the right stocks at the right time.

You see on the chart in the top left, stock selection has made up majority of our outperformance.

It hasn't been due to the market or sector tilts.

It really has been from that stock selection.

And lastly, it has also come from basically the top ASX 100 or ASX 150 where there's much stronger liquidity.

So you can get in and out of positions

particularly the moment where there's a lot of ETFs, a lot of people loaded up in the top ASX 100.

You need that liquidity to be able to get in and out, particularly when times get volatile and liquidity drives up in the market.

Look, I'll wrap it up there.

It's been great to present to you today.

I believe our contact details will be available to you all.

So please reach out if you'd like to hear more on the Sages Funds

contact me directly, more than happy to chat.

But just in summary, we think long-short strategies such as Sage Capital have a place in portfolios, particularly in the current environment where we're gonna see more volatility across the market as the impact of higher rates really starts to bite.

And we think long-short investing has a place in your portfolios alongside your traditional long-only or direct shareholdings.

So thanks very much, cheers.

Thank you Sam.