AFR: How Sage Capital is making money from other investors’ panic

^{Originally published in The Australian Financial Review on 6 May 2024 by Joanne Tran. See the original article or download the article.}

Ozempic, the weight loss wonder drug that took the world by storm last year, prompted many hedge fund managers to ramp up bets that ResMed’s shares were heading for a cliff.

Veteran short seller Sean Fenton took the opposite approach and bought more shares in late 2023. His bet paid off – so far this year, the ASX-listed medical technology firm has soared more than 30 per cent.

Fenton, who heads up Sydney-based Sage Capital, was relying on his quantitative skills to look past the market’s fear that the GLP-1 type drugs like Ozempic would hit demand for ResMed’s sleep apnoea devices and used it as an opportunity to buy more shares on the cheap.

The purchase proved prescient – ResMed shares are now trading at around $33.91 apiece after slumping almost 40 per cent from peak to trough in 2023.

“If you’ve got an investment approach where you are more systematic or rigorous in your approach, you acknowledge there’s some fear, but really [ResMed’s] earnings outlook was not changing. It was just starting to look cheaper and cheaper,” Fenton tells The Australian Financial Review.

“The market in its exuberance and excitement got carried away with the negative impacts [that the weight loss drugs] had on other stocks and how successful the drugs were to lose weight,” he says, before adding that weight loss may not cure sleep apnoea issues entirely.

Fenton is regarded as one of the most experienced long-short managers in the Australian market, with almost two decades of experience managing portfolios that lean heavily on quantitative investing.

He set up his own shop in 2019 after 15 years of running Tribeca Investment Management’s flagship Alpha Plus Strategy, which is now run by high-profile fund manager Jun Bei Liu.

‘People panic’

When he left the firm, Fenton took Tribeca colleagues Peter Moore and James Delaney with him as well as Kelli Meagher, who he had worked with at AMP Capital.

Quantitative investing, Fenton says, is all about discovering behavioural biases in the market that can cause investors to either underappreciate or overreact to a particular event.

“There are always people who fall in love with stocks or hate them,” he says.

“People panic when things start going wrong and get overconfident when things go well. All those different biases can lead to poor investment decisions.

“A lot of what we do is about exploiting those poor decisions made by people and trying to remove them from our own processes.”

It’s also part of the reason why Sage doesn’t run a concentrated portfolio of stocks, and instead holds over 100 long and short positions across a wide range of sectors.

Its holdings include industrial real estate investment trust Goodman Group (Fenton likes its strategy to develop facilities to become a global data centre powerhouse); utilities giant AGL Energy; and lithium producer Pilbara Minerals, which also just so happens to be the most shorted stock on the ASX.

The hedge fund manager argues that for a future that is so uncertain, the best strategy is diversification to allow for more “consistent” returns over time.

“I don’t believe anyone can actually have that level of confidence over their investment decisions to run a portfolio that is concentrated and to have consistent returns through time,” he says.

So far, the firm’s strategy appears to be working. The Sage Capital Equity Plus Fund has recorded a 12.45 per cent return per annum since its inception in August 2019, outperforming the benchmark S&P/ASX 200 Accumulation Index’s 8.3 per cent. The fund has also outperformed over a two-year and three-year basis, but has missed the mark over one year as of March 31.

While the fund is long Pilbara Minerals, it has benefited from shorting rival ASX-listed lithium plays Core Lithium, Sayona Mining and Lake Resources because of “stretched” valuations during the lithium rally in 2022 that sent prices to almost $US60,000 a metric tonne.

‘A low risk way to play’

Lithium prices have since plunged 80 per cent from their peak, prompting miners to cut output and sending all three lithium hopefuls down more than 50 per cent year to date.

“The projects were a bit overvalued,” Fenton says. “There’s a lot of retail money and hot money floating in there, it’s quite speculative. And it’s very vulnerable to a correction in pricing.”

Despite being “cautious” about the lithium mining sector, he names West Australia’s Pilbara Minerals as the exception because of the company’s “very strong” balance sheet.

“It’s got a clear path of production expansion, and they have done it without significantly blowing out capex, and because they were actually in production very early on in the price cycle they got the full benefit of that,” he adds. “It’s a low-risk way to play.”

Year to date, Pilbara Minerals’ shares are up around 4 per cent, while Sayona, Core Lithium, and Lake Resources have all roughly halved in value.

Fenton adds that Pilbara Minerals is a favourite among short sellers because of its comparatively more expensive price tag as a “high quality” stock.

AGL Energy is another company that the industry veteran thinks is being overlooked by the market and has an attractive valuation. AGL shares have dropped around 4 per cent this year to trade at $9.33 apiece.

While he acknowledges that there are “moving pieces” that the electricity provider is overseeing in retail pricing, he’s quietly confident that it can appropriately manage the pressure to transition from producing energy from coal and gas to renewables such as solar.

He also notes the increasing need and demand for electricity from big energy consumers like AI data centres (which also speaks to his holding in Goodman Group) and sees an opportunity for AGL during the transition.

“They can run their coal assets more efficiently and be able to turn them down in the middle of the day when there’s more solar, or invest in batteries that can capture cheaper electricity, and then sell it back to consumers at the end of the day,” he says.

Fenton got his first break at Credit Suisse working in company research and has now clocked up almost three decades in the finance industry. Having just returned from a series of meetings with companies in Europe, his advice to those starting out in finance is to travel for work.

“You can see such a broad cross-section of the economy and meet a range of very successful people who have achieved amazing things,” he says.

“You need to go out and see how these things work, get an understanding of how everything fits together across an economy and society, and the roles that different things play – it gives you a different perspective.”