Many of you will have seen this from Livewire - basically an advertisement for Sage Capital but I thought this part of the sales pitch useful for the community...
Why now is the time for long/short funds
Fenton believes that long/short funds are able to deliver high returns without concentrating towards a style (i.e. Growth versus Value) and losing the benefits of diversification.
"If you think of a long-only equity fund, if it wants to deliver high returns, it needs to hold fewer positions and the risk-return trade-off tends to deteriorate as you focus that down to move into style areas," he explains.
Every year, roughly half the companies will underperform the index and half will outperform, Fenton says. Employing a long/short model means that Sage only needs to get 55%-60% of these calls right to produce "killer performance".
To do this, Sage groups the stocks within the S&P/ASX 200 into eight sectors:
"What we're trying to do long/short wise is to pick the best and worst of the companies within those groups and be pretty neutral to them," Fenton says.
"We don't take on a lot of style bias. We don't have a lot of macro risks. We're not going to shoot the lights out or blow up if Jerome Powell comes out and announces he will be tightening rates tomorrow."
For example, currently within the global cyclical group, Sage is long Corporate Travel (ASX:CTD) and short Flight Centre (ASX:FLT).
"We see Corporate Travel, with its greater exposure to the US, making good acquisitions at the bottom of the market with much better growth," Fenton explains.
"Whereas Flight Centre is trying to transition from a retail brick and mortar model, and they're more domestic-focused and also impacted by Australian lockdowns. While the US is opening up and people are travelling again."
Fenton points to other recent long plays like BlueScope Steel (ASX:BSL), which has benefited from inflationary dynamics and a boom in US steel prices, as well as ResMed (ASX:RMD), a beneficiary of COVID-19 that received an added boost after its competitor Philips Respironics had a major recall of its C-PAP machines.
On the short side, Fenton points to AGL Energy (ASX:AGL) and A2 Milk (ASX:A2M) as winning positions, the former which has slid 54% over the past year, and the latter which has suffered a similar fate, falling 68%.
"Coal-fired power isn't exactly the flavour of the month, and AGL has been worn down from pressures of solar swamping the wholesale electricity market and driving prices down there," Fenton says.
"A2 Milk has been a good short as domestic competition in China heats up and it has been impacted by COVID-19 lockdowns and daigou reseller channels."
The full 'article' here... https://www.livewiremarkets.com/wires/an-8-sector-strategy-for-killer-performance