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During the month of March, the CC Sage Capital Absolute Return Fund delivered a net return of 0.32%* outperforming its benchmark by 0.32%. The CC Sage Capital Equity Plus Fund delivered a net return of 7.01%*, outperforming its benchmark by 0.12%.
The S&P/ASX 200 Accumulation Index finished March up 6.89%, outperforming all other developed equity markets. The month was characterised by news flow relating to peace talks between Russia and the Ukraine, high volatility and a breakdown in the typical relationship between bond yields and equities, with markets rallying even as bonds moved higher in yield.
All Sage Groups^ were up for the month, the strongest being Resources (+11%) and Yield (+9%). The Resources Sage Group was driven by continued strength in commodity prices, year to date iron ore was up 34%, aluminium 25%, nickel 58%, and oil 38%. The Yield Sage Group strength was due to bond yields climbing higher again with the Australian 10-year bond yield now at 2.8% versus 1.7% at the beginning of the year. The weakest Sage Group was REITs (1%), which unlike the Yield Sage Group, doesn’t experience any revenue uplift from higher bond yields.
We believe the impact of rising inflation will continue to be felt across all parts of the economy with the Russia-Ukraine war and further Covid lockdowns in China exacerbating the global shortage of raw materials and driving up food and energy prices. We prefer companies with pricing power that can benefit from higher inflation such as supermarkets. We're more cautious on consumer discretionary stocks with a backdrop of high levels of household debt, rising cost of essentials, moderating house prices and looming interest rate rises.
The persistent high inflationary environment has also induced the US Federal Reserve to pivot more hawkishly on its outlook for monetary policy. The nominal yield curve has already begun inverting, perhaps signalling recession, although we prefer to look at the real yield curve which highlights quite easy monetary conditions. This creates a lot of uncertainty, with tightening liquidity likely to increase volatility. The cycle likely has further to run, but risk premia are likely to keep expanding as a hard landing becomes a real risk. We retain a preference for companies that either have positive earnings exposure to higher yields, or reasonably defensive earnings. High valuation multiples are likely to be compressed as liquidity tightens.
Given this high level of macro uncertainty, we continue to focus on company earnings in the portfolios which are, as always, well diversified and positioned to weather the myriad of unknowns. Utilising Sage Groups allows systematic macro risks to be minimised as much as possible while benefiting from bottom-up stock selection.
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