Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 425

Sean Fenton on marching to your own investment tune

Sean Fenton is the Founder and Chief Investment Officer at Sage Capital, an Australian equity long short fund manager. Sage Capital has been nominated for the Rising Star category in the Zenith Fund Manager of the Year Awards 2021.

 

GH: Sage invests a little bit differently with a 'market neutral' fund that aims to generate returns independently of the direction of the overall market. It balances long and short positions, while your equity fund can also short stocks. Have the last 12 months of strong equity markets been particularly difficult for shorting?

SF: When we think about shorting, we're not necessarily just looking for stocks that might go down or fall in absolute value. Because we're a long/short fund, anything that we short is essentially reinvested back into the longs. With our absolute return fund or market neutral fund, the longs and shorts are balanced so that our stock selection drives returns.

In our equity plus fund, when we’re shorting, we’re actually taking extra-long positions. We might be 30% short but we’re 130% long. That means the decision on shorting comes down not just to stocks that are falling but stocks that are underperforming the index. That's the key to generating active returns.

In any market, a whole range of stocks are underperforming and some are outperforming and our focus in shorting is on finding underperforming stocks. So while the market has been rising strongly, it's still been a great environment for active management with some things going up and some going down.

GH: In your equity plus fund, are you able to measure how much of your return has come from your longs and how much from your shorts?

SF: We've been running Sage Capital for a couple of years but long/short funds for over 20 years. Over the long period of time, it’s fairly even. In the last year, the longs were doing better than the shorts as the market was really running and the shorts were funding the long activities. That started to turn around more recently with the shorts adding more value in the process as well.

GH: You wrote an article in Firstlinks about central banks dominating financial markets and reducing the efficacy of pricing signals on stocks. Is this central bank activity making stock picking more difficult?

SF: In some ways, it’s more difficult but it’s also opening opportunities. It’s certainly something you need to take into account in building portfolios. The role of central banks with big QE programmes and negative real rates is manifested across the world. Everything from the value of your house to crypto currencies and non-fungible tokens. It’s intriguing that the value of office properties has been rising despite leasing falls and vacancies. P/E ratios have gone stratospheric in many cases, so you've got to be aware of that as a risk. You can’t simply fight and say stocks are really expensive because bond yields are very low, driving that dynamic.

It is driving a poor allocation of resources across the economy and we're going to pay the price for that in low growth. But in terms of stock selection, it's a risk and we try to be neutral to that thematic. One day, maybe not too far in the future, central banks may change tack in both winding back asset purchases and actually increasing interest rates, and that will drive a new dynamic.

GH: We’ve all needed to recalibrate what we think is reasonable value in a whole range of assets.

SF: Yes, I've gone from thinking a P/E over 20 times is expensive to now that's cheap, and you've got to be over 50 times to raise the eyebrows.

GH: Are there other big market trends that you're backing at the moment?

SF: We’ve been going short iron ore as the price had become so elevated and the market wasn't particularly tight as Vale in Brazil was gradually coming back and normalising. Then China was starting to peak out as well, and now we're seeing a new dynamic where China's policy focus is more on common prosperity. They also want to reduce their carbon intensity and wind back steel production. Another dynamic is Evergrande, one of the largest property developers essentially approaching bankruptcy, so we’re seeing the property cycle roll over.

On the positive side, coming out of reporting season, insurance globally and domestically is strong with more pricing power for companies. Global business insurance is seeing double-digit increases. It’s good for QBE and to a lesser extent IAG and Suncorp. There’s some concern about business interruption but we see some long opportunities through the insurance cycle.

GH: Have you got a couple of stocks in your portfolio that you're most confident that the market is under appreciating, where it's frustrating that you see the value but the market doesn't?

SF: Yeah, that's the bane of every investor, the stuff that the market doesn't appreciate. You've got to be careful that you're not just marching to your own tune. You don't want to sit there for years waiting for everyone else to realise that you're right.

One that’s like that at the moment is South32, it’s really done nothing for a long time. It's gone through a transformation and now has an interesting mix with a premium aluminum exposure but also metallurgical coal and manganese. Aluminium has been very strong lately. They're generating massive free cash flow and they're in more of an ascendancy.

GH: Any industrial stock, perhaps a value stock left behind in the growth story?

SF: An interesting turnaround is Incitec Pivot, which had a whole litany of woes on the operational side, but we look at what's happening globally, with price strength in wheat and corn and increased plantings and use of fertilisers. Some missing parts are now sorted out, but the stock’s been largely ignored and put on the sidelines. So, if they can show some operational stability, with a lower Aussie dollar, we see a potential value play and a turnaround opportunity. Although Hurricane Ida just rolled over one of their plants…

GH: What about the one that got away, the stock you look at each day that was on your radar but it didn't quite reach your price?

SF: We continually reassess and don’t let things get away too much but one stock where we sat on the sidelines for too long is Xero. It's a company that has a unique product, a global rollout story with accounting software in the cloud space. But it's never really generated much profit as it's continued to invest in growth, on traditional metrics it’s always looks ridiculously expensive. We eventually took a position but it’s one that we watched for a while.

GH: And is there one which you sold too soon, that has just kept running?

SF: James Hardie is one where we had a much bigger position a year ago. It's done very well to move higher, but we've taken profit along the way. We don't regret it but it’s hard to buy back in once you have sold.

GH: Do you ever make a trade-off between income and capital growth, where you feel your portfolio needs income, but you might not get the price gain?

SF: We make holistic decisions looking at total return, with capital growth and income combined although there are different drivers. We split the market into different groups and in the growth group, there’s not a lot of income being generated, it really is capital return. Whereas we've got another grouping, which we call yield, which is full of banks, where valuations are more important. And we have defensives including infrastructure and utilities, and income generation is given more weighting in those areas. But we're always looking at the trade off with capital growth.

GH: Can you give us some insights into your business, where the flows are coming from, any plans for listed vehicle?

SF: We've really been focused on the retail and wholesale market through independent financial adviser groups, we're available on a range of platforms, and we're getting good flows across different dealer groups. We don't have any short-term plans for a listed fund but it's something that we will look at to broaden that access channel. We're not big fans of LICs so a listed open-ended structure that provides liquidity without the NTA discounts has more promise. We're also setting up a structure for offshore investors.

 

The full unedited interview with Sean is included in this week's edition of our podcast, Wealth of Experience.

Graham Hand is Managing Editor of Firstlinks.

Sean Fenton is Chief Investment Officer and Founder of Sage Capital. This interview contains general information only and does not consider the circumstances of any investor.

Sage Capital is an investment manager partner of Channel Capital, a sponsor of Firstlinks. For more articles and papers from Channel Capital and partners, click here.

 

RELATED ARTICLES

Reece Birtles on selecting stocks for income in retirement

Six stocks positioned well for a solid but volatile recovery

Which companies will do well in the turmoil of 2020?

banner

Most viewed in recent weeks

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Welcome to Firstlinks Election Edition 458

At around 10.30pm on Saturday night, Scott Morrison called Anthony Albanese to concede defeat in the 2022 election. As voting continued the next day, it became likely that Labor would reach the magic number of 76 seats to form a majority government.   

  • 19 May 2022

Comparing generations and the nine dimensions of our well-being

Using the nine dimensions of well-being used by the OECD, and dividing Australians into Baby Boomers, Generation Xers or Millennials, it is surprisingly easy to identify the winners and losers for most dimensions.

Latest Updates

SMSF strategies

30 years on, five charts show SMSF progress

On 1 July 1992, the Superannuation Guarantee created mandatory 3% contributions into super for employees. SMSFs were an after-thought but they are now the second-largest segment. How have they changed?

Investment strategies

Anton in 2006 v 2022, it's deja vu (all over again)

What was bothering markets in 2006? Try the end of cheap money, bond yields rising, high energy prices and record high commodity prices feeding inflation. Who says these are 'unprecedented' times? It's 2006 v 2022.

Taxation

Tips and traps: a final check for your tax return this year

The end of the 2022 financial year is fast approaching and there are choices available to ensure you pay the right amount of tax. Watch for some pandemic-related changes worth understanding.

Financial planning

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Infrastructure

Listed infrastructure: finding a port in a storm of rising prices

Given the current environment it’s easy to wonder if there are any safe ports in the investment storm. Investments in infrastructure assets show their worth in such times.

Financial planning

Power of attorney: six things you need to know

Whether you are appointing an attorney or have been appointed as an attorney, the full extent of this legal framework should be understood as more people will need to act in this capacity in future.

Interest rates

Rising interest rates and the impact on banks

One of the major questions confronting investors is the portfolio weighting towards Australian banks in an environment of rising rates. Do the recent price falls represent value or are too many bad debts coming?

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.