Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Sage Capital portfolio manager Kelli Meagher tells how her team steered through the COVID crash last year and which companies are set to take off in 2021.
Investment style
The Motley Fool: What's your fund's philosophy?
Kelli Meagher: We have two funds. We have the Sage Equity Plus Fund and the Sage Absolute Return Fund. The difference is the Absolute Return Fund is market-neutral, and its returns are uncorrelated to the equity market; and the Sage Equity Plus fund does give exposure to the S&P/ASX 200 Index (ASX: XJO). The overall strategy of stock selection and risk control for both of those funds is the same.
We basically are looking to invest in a broad range of stocks, both long and short. And to build a diversified portfolio that's style-neutral, so not just value stock or growth stock.
A unique element of our strategy is our use of our proprietary Sage Groups, which groups companies by how they tend to perform in different market conditions. This is quite different from grouping companies by GICS sectors. It allows for more of an 'apples vs apples' comparison of stocks and helps to control macro risks.
We end up having about 80 to 100 positions, both long and short.
And we use a really tight risk control overlay to minimise the systemic risks in the market – the broad macro risks that are completely unpredictable, like bond yields, FX changes, sudden changes in sentiment, pushes to growth and value.
We're basically just focused on managing our stock selection and making sure our returns are coming from that and trying to remove all the other external risk factors. That way, we can offer investors a portfolio that can produce good returns no matter where we are in the cycle.
MF: For your long positions, what's your investment horizon usually?
KM: We like to say 1 to 2 years, but it really does vary. Some companies are good investments for years and years and years, and the underlying fundamentals support that. Otherwise, sometimes it's more of a short term share price move, and it's time to move on to something more attractive.
MF: How have you performed the past year?
KM: We've actually had a really good year. We have outperformed our benchmark substantially and had very few months where we were down. So it's been a really good start to our funds, particularly in the context of a global pandemic.
MF: Did you manage to buy some shares back in March or April?
KM: We take long and short positions, so what we did really well through COVID is, we were quite early in positioning the portfolio. Watching the numbers in China each day, we were getting concerned quite early about COVID, and so we managed to position ourselves before the market got smashed – by selling out of our travel stocks and buying Resmed CDI (ASX: RMD) and buying Fisher & Paykel Healthcare Corp Ltd (ASX: FPH), the COVID winners. We also went all-out on supermarkets.
So we were well-positioned for when the market had its big pullback. Then once that happened, we started to enter the market and started buying some of the stocks that we sold like Flight Centre Travel Group Ltd (ASX: FLT), Corporate Travel Management Ltd (ASX: CTD) and the various stocks that had been smashed. We were able to produce a pretty good return, which we're happy with.
Buying and selling
MF: What do you look at closely when considering buying a stock?
KM: We look at a whole range of things. We do a lot of fundamental analysis on the quality of the company, and that determines how much we're willing to pay. We spend a lot of time looking at the structure of the industry the company operates in, how competitive the industry is, what position the company has in that industry, how high the barriers to entry are, what the company's competitive advantage is, and what the regulatory risks are.
We're always also looking ahead to see if we can spot any changes in industry structure and how that may impact the company either in a positive or negative way.
Then we also examine the company specifics really carefully: The quality of the management and board, and long term competitive advantage, what return on the shareholders' capital has the company generated, are there good long term growth prospects, how much cash do they generate and their general trade record.
And we then value the company either on earnings before interest, tax, depreciation and amortisation (EBITDA) or price-to-earnings (P/E) ratio, then it's the combination of the quality and our valuation that dictates whether we take a position and how big that position is.
MF: And as you said before, you're agnostic about growth and value?
KM: That's right, that's right. We very much try to make our portfolio style-neutral, so that we can produce good returns for our investors no matter what the latest [fad] stock is in the market – be it growth, value, big cash, small cash, tech on, tech off.
MF: What triggers you to sell a share?
KM: It might be because the stock went up to our evaluation. It might be there's been a change of the fundamentals of the business. There might be red flags regarding major sell-downs or a lot of senior management running to the exit. That'd be a major red flag to us to dig a bit deeper. Or just any change [that] basically affects the original buy thesis.
And because we're active investors, it might be we just trim a position and put the money to work elsewhere where we see a better opportunity.
MF: Are you most of the time fully invested, or do you have some cash in hand?
KM: We try to be fully invested all the time. We carry very little cash.
What's coming up?
MF: Where do you think the world is heading at the moment?
KM: Great question. We think the world's in a pretty good place. We've obviously got the vaccine rolling out globally, and we've got huge amounts of fiscal and monetary stimulus.
There will be some bumps in the road though. The share market's almost up to its pre-COVID highs, after taking in a lot of good news and recovery.
So it's certainly not going to be a straight line [for] the market, and we'll be watching a bit carefully to see what the impact is. There will be the expiry of JobKeeper, and it remains to be seen how long it actually takes out to roll the vaccination programs around the world.
But given where rates are, shares are obviously an attractive asset class – [you're] not getting your return from your money in the bank.
Generally, I'm optimistic about the market, as long as you're in it for the long term.
MF: The Australian market underperformed last year compared to other regions. Do you think it'll pick up this year?
KM: I do… we're quite bullish on Australia I think. Obviously, we've managed really well through this pandemic and compared to a lot of other countries we're in a really good place.
With all the fiscal as well as the monetary stimulus, we're quite bullish in areas like housing. Australians love housing. We see very strong data coming in for approvals, etc. We're positioning the portfolio for a strong housing market in the next year.
Overrated and underrated shares
MF: What's your most underrated stock at the moment?
KM: It's interesting that question because with how strong the market's been across the board, it's hard to pick a stock that's genuinely underrated.
MF: There aren't many bargains left, are there?
KM: There are not many bargains out there. There's one though that we really like that has underperformed in the last quarter or so and we think it has good long-term growth prospects – and that's Resmed, the healthcare company.
There are two strong themes for the future of healthcare, and that's technology and value. For a healthcare company, [Resmed is] extremely innovative and a very high amount of technology integrated to all their products and services. And you need that technology to be able to also prove to payers that you're saving them money.
COVID has really highlighted the importance of respiratory health and the value in being able to manage and monitor patients remotely… It has fantastic long-term global growth. It generates a huge amount of cash, it's got good management and a really good track record of allocating shareholder capital.
So we think over the long term it will continue to deliver really good growth.
MF: Is the health technology sub-sector generally pretty attractive in the long term because of the aging population?
KM: You can't go too [wrong] on investing in that part of the market over the long term.
MF: What do you think is the most overrated stock at the moment?
KM: There are pockets of the market that are overvalued, and that's purely a function of interest rates, plus I guess a bit of a flight to quality.
So a lot of the companies that are actually really good quality I would say are overrated at the moment – simply because they're trading on evaluations where it's baking in a huge amount of earnings growth that may not be able to be delivered.
MF: As a long-short manager, do you have thoughts on the recent GameStop chaos in the US?
KM: We've been watching the circus from afar. I think it's a symptom of the shift to a huge amount of inexperienced retail money chasing something. And I guess a lot of people having more time on their hands.
MF: Do you think structurally such uprisings are less likely to happen in the Australian market?
KM: Yes. I do. Certainly, our options market is structured very differently, and we don't have that same social [pressure]. Obviously, there are [Australian] chat rooms, but I just feel like there's not that same social media.
Looking back
MF: Which stock are you most proud of from a past purchase?
KM: The thing I'm most proud of is how we navigated COVID and being quite agile with our positions. We were early in reducing our exposure to the travel sector then positioning the portfolio with COVID winners like healthcare stocks Resmed and Fisher & Paykel, the supermarkets, and JB Hi-Fi Limited (ASX: JBH).
I know that's probably not the answer you're looking for. But there's not one [stock] because there was so much volatility… I'm just proud of how agile we were.
We are active investors, and we were always incorporating incremental information into our portfolio. I think our process really helped in outperforming through that time.
MF: The travel shares that you guys sold off before the pandemic, have you bought back in anticipation of a recovery?
KM: We did buy some Flight Centre and Corporate Travel. We still own Corporate Travel. I think that's a good long term story with its acquisition in the US. It's got more going for it than just simply a pick up in business travel.
MF: Is there a move that you regret from the past? For example, a missed opportunity or buying a stock at the wrong timing or price.
KM: Yes, definitely the missed opportunity of the online e-commerce stocks – the retail online stocks.
[Meagher previously spoke of her regret at missing the rise of Temple & Webster Group Ltd (ASX: TPW)]
I regret how conservative I was with my valuation discipline, I suppose, when it came to pure online retail stocks when they first started moving last year. And they've gone up, doubled and tripled, I saw that I'd missed the opportunity – and they just kept going. So there's definitely some remorse from sitting on the sidelines there.
