In this Q&A, we delve inside the mind of James Delaney, Portfolio Manager at Sage Capital. Within the investment team, James is specifically responsible for covering the Financials, Tech, Telco & REITs sectors.
I got started in investment management 13 years ago as an analyst at MIR, a fund manager blending quantitative and fundamental approaches. Working with a team based in Asia covering the Australian market provided me with valuable insights into the strengths and limitations of both quantitative analysis and fundamental stock picking.
Three years later I joined Sean Fenton at Tribeca, where I was introduced to long short investing and the process he had developed over many years, which we continue to utilise at Sage Capital. Shorting opened a whole new perspective for me. When looking for long ideas, one inevitably compares a stock with its peers, asking whether it’s the better investment. Shorting enables you to use the full spectrum of information acquired in the normal course of research. It involves selling companies that are less likely to perform well and use those funds to invest more in their stronger peers.
The best place to start when looking at any company is its earnings trajectory, ultimately through time share prices will track a company’s earnings, so you must understand where it is going. To determine a company’s earnings potential, we analyse its position within, and the structure of its industry, the quality of its management team, and its financial history to determine the effectiveness of its capital allocation decisions. We identify long positions in companies that stack up well versus their peers, while short positions are taken in companies facing structural issues or material earnings risks.
Our risk control is built on the foundation of our eight ‘Sage Groups’, which group stocks by economic risk factors. These eight groups are Yield, Growth, Defensives, Gold, Resources, Global Cyclicals, Domestic Cyclicals and REITs. Within each Sage Group, we maintain both long and short positions, and limit our net exposure to any sector. This approach helps us control systemic macro factors effectively and allows us to focus on pure stock selection.
It’s always a stock pickers market. Ignoring company specifics and investing purely on themes is a great way to lose money. For the best example of this all you need to do is look at Domain and REA’s share price performance. Both companies provide online property listings but REA’s market position, management team and strategy have proven far superior resulting in cumulative shareholder returns 100% over Domain or the broader market over the last five years.
I think many people struggle with the notion that shorts don’t necessarily need to be fraudulent or severely mispriced to add value to a portfolio. Every short position provides additional funding for long positions, essentially reinforcing your stock selection. For instance, shorting $1 of company A gives you an extra dollar to invest in company B, therefore long short investing is focused on enhancing stock selection.
In addition, I think investors often perceive long short investing as inherently risky. However, short positions can actually be used to control for style tilts across the portfolio, a flexibility not available to long only portfolios. With long only investing, it is difficult to control exposure to certain sectors when you have a high conviction long position. You can only balance it out by not holding other index weights in that sector, which depending on the sector may not be enough. Long short investing can take active underweights in excess of benchmark weights, so when utilised correctly, long short investing can provide stronger risk-adjusted returns than pure long only investments.
“Simple theses are the ones that work!”
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