Performance summary

As a market neutral strategy that aims to provide an uncorrelated source of returns whilst eliminating equity market exposure, the CC Sage Capital Absolute Return Fund returned -0.33% after fees, underperforming the RBA Cash Rate by -0.34% during the month. Over 1 year, the Absolute Return Fund has returned 12.69% after fees, outperforming it’s benchmark by 12.38%. Since inception, the Absolute Return Fund has returned 10.56% p.a. after fees and outperformed its benchmark by 10.13% p.a.*

As an active extension strategy that aims to always retain exposure to equity markets, the CC Sage Capital Equity Plus Fund returned 9.91% after fees, underperforming the S&P/ASX200 Accumulation Index by -0.30% during the month. Over 1 year, the Equity Plus Fund has returned 5.70% after fees outperforming it’s benchmark by 7.68%. Since inception, the Equity Plus Fund has returned 10.11% p.a. after fees and outperformed its benchmark by 7.00% p.a.*

Market review

The S&P/ASX 200 Accumulation Index rose by 10.21% during November, which is the highest monthly return since the index began in 2000. The move was all about the announcement of effective COVID-19 vaccines which saw the market aggressively reprice stocks that had been hit by the economic shock. The U.S. presidential win for Joe Biden also helped set an overall positive tone for the market.

The best performing sectors were Energy followed by Financials, Communication Services, REITs and Industrials. Consumer Staples was the worst performing sector followed by Utilities, Health Care and Information Technology. The sector performance is reflective of a massive rotation from momentum to value with stocks most heavily impacted by COVID-19 lockdowns and demand disruptions such as travel, shopping centres, banks and energy stocks all bouncing the hardest.

Portfolio positioning and outlook

While markets have been surging higher, there has been a significant outperformance of cyclical value within this dynamic. We would expect a broad recovery in cyclical stocks such as Metals and Energy within Resources over bulks and gold. Later stage cyclicals such as Media also have some room to catch up. A stronger growth environment should also lead to higher asset prices and higher bond yields, both of which we think should favour banks, allowing them to write back credit provisions and reduce pressure on margins.

On the negative side, there is the potential for some of the shifts in retail spending patterns to reverse. The most prominent of these is car sales, and homeware sales may not continue at their current record pace next year, with vaccines promoting a fast return to normal and consumers having more options for their spending. On a medium term basis, the work from home shift will drive the performance of companies related to office work and transport. The extent to which this trend remains leaves us cautious on stocks exposed to these areas.

Relations with China have continued to deteriorate with further restrictions on Australian products being sold in China including some punitive tariffs introduced on wine exports. The range of trading restrictions is now quite broad with only iron ore being seemingly immune. However, even this faces medium term risks with China looking to accelerate its use of scrap in steelmaking as well as developing the Simondou project in Africa. What will be interesting is the extent to which students and tourists from China avoid Australia once international border restrictions are lifted. Overall, we remain cautious on companies that are exposed to growth from the Chinese consumer.

The success of vaccine trials and the likely move back towards normality over 2021 favours the ongoing outperformance of cyclical recovery stocks over long duration and defensive assets. This warrants a small tilt towards such stocks while still maintaining a tight exposure to the broad Sage Groups~. While it seems unlikely at this stage, any rebound in inflation that pushes bond yields higher would magnify this rotation.

~Sage Capital uses a custom grouping system for long short positions including Defensives, Domestic Cyclicals, Global Cyclicals, Gold, Growth, REITs, Resources and Yield.

* Past performance is not an indicative of future performance. The inception date of the CC Sage Capital Absolute Return Fund and the CC Sage Capital Equity Plus Fund is 20 August 2019.