The battle of the big caps

Australia's large caps, energised by cheap debt and ultra-accommodative fiscal policies, stormed through the pandemic and beyond. The S&P/ASX 200 hit an all-time high in August this year, lifting more than 54% since March 2020, and returning nearly 15% over the past 12 months. In this wire, we stage a battle of the large caps in which Sean Fenton, long/short portfolio manager of Sage Capital, shares why he splits the S&P/ASX 200 into eight groups to consistently outperform the index. Plus, he names the stocks he's buying and those that he's short from each group.
Ally Selby

Livewire Markets

Australia's local large caps have demonstrated their fighting spirit. Energised by cheap debt and ultra-accommodative fiscal policies, these stocks have well and truly recovered from the blow they sustained a mere 19 months ago, storming through the pandemic to enrich their loyal followers (that's you, investors). 

In fact, the S&P/ASX 200 hit an all-time high in August this year and has lifted more than 54% since the COVID-19 lows in March 2020. Over the past 12 months, it has returned nearly 15%. 

But now, with macro risks abounding (think bubbles in housing prices, cryptocurrencies and battery material and EV stocks, to inflation, rate rises and the dreaded "t" word - tapering), there's no better time to pit these large-cap darlings head to head. 

In this battle of the large caps, long/short portfolio manager Sean Fenton, of Sage Capital, shares why he splits the S&P/ASX 200 into eight groups to consistently outperform the index. Plus, he names the stocks he's buying and those that he's short from each of these eight groups.

Note: This video was shot on Tuesday 9th of November 2021. You can watch the video or read an edited transcript below. 

Edited Transcript 

Can you take us through your investment strategy? 

Sean Fenton: It's really hard to compare stocks directly, right across the market. It's hard to say Commonwealth Bank is going to be a better investment than BHP because they're so wildly different. You've got to make some big calls in terms of what's happening in the world. The biggest driver there is probably going to be what's happening to interest rates around the world and global growth. That can be a really difficult thing to forecast. There's more of a likelihood you'll make errors. 

So, we split the market up into eight broad groups. They range from domestic and global cyclicals to defensives, growth stocks, gold, resources, REITs (real estate investment trusts) and yield stocks. We focus on looking at stocks within those groups. It's a lot easier to say, "Commonwealth Bank looks like a buy versus Westpac." Or, "Computershare looks like a buy versus ANZ" — not necessarily a bank, but still a financial that is impacted by yields.

You don't have to worry so much about what's happening in the world. Instead, you can just worry about the fundamentals of those companies and what's driving their earnings.

Splitting the market into groups makes it easier to compare stocks. It actually makes our job easier in terms of picking good and bad stocks. Being able to get a long and short, but it also helps us control our macro risk as well.

We're not necessarily taking a big bet that we are unaware of - like we're long value versus growth. That can just shift as real yields shift around the world. By being balanced between those sectors, we strip out a lot of the macro risk and allow our ability to forecast company earnings and individual stocks to come through.

The percentage of calls you need to get right to outperform is actually surprisingly low. A lot of people think, "Oh, wow. To be a great investor, you've got to get 90% of your calls right." If you're running a broad, diversified fund, like we do with a range of long and short positions, the threshold to consistently add value is far lower.

If you're hitting 55% right and 45% wrong, you're actually doing really well in terms of your portfolio and the returns you can deliver. If you can hit 60% of your calls correct, you're top of the pops; you're really knocking it out of the park on a consistent basis.

Domestic cyclicals

  • Companies exposed to domestic economic cycles. 
  • Building materials, companies exposed to the housing cycle, retailers, media companies, industrials. 

A company that we're long at the moment, that we've been buying, is CSR (ASX: CSR). It's exposed to the housing cycle. It's a very strong market going through there, with a record level of commencements for detached family homes. They'll continue to benefit from that pipeline of work for several years. 

On the short side, we are looking to hedge that position with Qantas (ASX: QAN), which is recovering now that we've got through the COVID shutdowns, but it's got some challenges.

Business travel is going to be more challenging, as people tend to replace travel with Zoom meetings and that's a high yield part of their overall market. You've got a reasonably rational duopoly there with Virgin, but Rex is nipping around the edges. But importantly, the share price has just recovered so far. They've raised a lot of debt, so the enterprise value now is really at pre-COVID levels. So, risk-return is just not there for us on that one.

Global cyclicals

  • Companies exposed to global economic cycles. 
  • Mining services, agriculture stocks, global industrials. E.g. Brambles (ASX: BXB), Amcor (ASX: AMC), Ansell (ASX: ANN), Incitec Pivot (ASX: IPL), Orica (ASX: ORI).

Incitec Pivot we see real value in. It makes explosives and fertilisers. The value of fertiliser around the world has really taken off, as with a lot of commodity prices. Things like DAP (diammonium phosphate), ammonia nitrate, urea — all things that they produce — are at highs. It's just not being reflected in the Incitec share price.

They've had some operational issues at Waggaman in Louisiana, which got hit by a hurricane recently, but they've got over those and we see a lot of upside to commodity prices there.

Orica is a similar business, but not really the fertiliser side. They're more ammonia nitrate for explosives. A bit more exposure to the coal sector, which has got pressure; a little bit more competition from imports. So a good hedge against Incitec there, but not the same upside through fertiliser pricing and a little bit more downside from coal exposure.


  • Companies that can withstand economic cycles, with reliable earnings.  
  • Supermarkets like Coles (ASX: COL) and Woolworths (ASX: WOW), telecommunications like Telstra (ASX: TLS), and infrastructure stocks like Transurban (ASX: TCL or Sydney Airport (ASX: SYD). 

At the moment, one of our favourite stocks there is actually Auckland International Airport (ASX: AIA). Sydney Airport has been taken over, so we are rolling some of our long there into Auckland airport. 

You've got the recovery in travel to flow through there, but they've actually got a lot of surplus land; a lot of industrial land, that's undervalued within the company as well. Where you're seeing the price of industrial real estate going around the world, we see the opportunities, either for them to monetise it or someone to take them out, like Sydney Airport as well.

On the short side, it's really just a valuation short with Woolworths, which I think is a great company with a great track record of delivering long-term earnings growth, but that earnings growth is more than fully captured in the share price. The multiples have really got up to record highs. That's a good hedge in the space for us.


  • Companies that mine, produce and sell commodities. 

We see long potential, as with everyone else, in electric vehicles and battery technology and the commodities that go in there. That ranges from lithium to copper and nickel — things that go into batteries.

A stock we like is IGO (ASX: IGO) (formerly Independence Group) which has recently transformed its business. It has sold its Tropicana gold mine interest and bought Greenbushes, which is a very large lithium play with a lithium hydroxide refinery at Kwinana as well. It also has nickel and copper exposure. So, a good spread of metals going into electric vehicles and batteries. That thematic, I think, has obviously got many years to run as the world transitions to electric vehicles.

On the short side in resources, we've seen a real shift coming out of China in the last year or so. They've really tightened up credit availability, particularly for the property sector. That's led to a lot of distress there. 

Companies like Evergrande are looking like they're hitting the wall and now cascading defaults are going through the property sector there. Combine that with some tightening steel production to hit emission targets and carbon dioxide emission targets. Chinese steel production has dropped off the cliff in the last half of the year and it has taken the iron ore price with it. The other thing that happened is the discount for low iron ore grades has also expanded. 

On the short side, we are looking at companies like Fortescue (ASX: FMG), which was tricky at the start of the year because it looked really cheap with massive free cash flow yield. But because it's a pure iron ore play and particularly that 58% grade discount is widening, its cash flow is rapidly plummeting. We still see short potential there.


  • Split from resources as it behaves more like a currency. 
  • Gold price is driven by real interest rates around the world and US real interest rates (US dollars). 
  • Very volatile, but can be defensive in certain market environments. 

A stock we really like there is Perseus Mining (ASX: PRU). Generally, when we look at gold stocks, it's really the ability for development, production, expansion and upside. And where they sit on the cost curve.

Perseus has been doing a great job in terms of actually delivering on production targets, but actually, with some exploration development success and expanding its production profile going forward. So creating value for shareholders.

On the short side, we've been shorting Evolution Mining (ASX: EVN), which got pretty expensive and started to have a few production issues and has been coming under a little bit more pressure.

Real estate investment trusts (REITs)

  • Passive property holding companies, some with funds management models like Goodman Group (ASX: GMG), Chater Hall (ASX: CHC), and Centuria Capital (ASX: CNI)

REITs with funds management models are actually the sort of businesses that we like a little bit more in REITs, because they do offer a little bit more growth. They've often got a fund sitting under that they can invest in.

Charter Hall is one of our favourite companies. They're quite exposed to the industrial space, industrial offices, and doing really well. They're continuing to grow their fund management business as well.

As we touched on before with business travel, we're probably a little bit more cautious about the office market. People aren't coming back into the CBD — they enjoy the flexibility of working from home. You're still seeing very high office vacancies and releasing spreads are down over 30%. There's pressure in that office rental market. So we see that as a decent funding source. A couple of REITs with higher office exposure there are things like Dexus (ASX: DXS) and GPT Group (ASX: GPT). 


  • A diverse grouping that draws on companies from a range of different GICS (Global Industry Classification Standard) sectors. 
  • Technology companies, some telcos, healthcare companies, consumer discretionary like Aristocrat (ASX: ALL) and Breville Group (ASX:BRG), builders like James Hardie (ASX: JHX) and Reliance Worldwide (ASX: RWC), and classic growth names like Xero (ASX: XRO). 

It's really hard to manage a portfolio and decide whether you want to be in or out of these stocks because they often trade on huge valuation premiums to the rest of the market. We just look at them separately.

An example we like is James Hardie (ASX: JHX), which has been doing really well. Its growth story is not just about US and Australian housing growing, but their penetration of those markets. They are penetrating those markets with their fibre-cement siding products and growing their top line above-market growth rates. They're getting into more value-added products, expanding their margin, leveraging their operational efficiencies.

They're tapping into new markets, addressing the stucco market in the US, and moving more into high value-added products. And they're moving more to direct consumer marketing as well. We see ongoing strength there and a strong underlying US housing market as well.

On the short side, we are looking more for stocks that tend to be pure bond proxies. In a rising rate environment, they don't have necessarily the strongest underlying earnings growth rate, but their valuations really expanded with low-interest rates.

That might be something like NEXTDC, which has been growing really well. Everyone wants hyper-scale data centres. They've got some good advantages in terms of co-location and cross-connects, but at the end of the day, it's a business about putting racks into air-conditioned buildings and the price of electricity.

They continue to grow and develop it, but they're much more exposed to pure bond yield changes and valuation changes. In an environment where bond yields may be lifting, we want growth companies that are actually able to grow their earnings and have a bit of leverage to upside there.


  • Stocks that are more sensitive to the yield curve - both its slope and its levels. 
  • Generally financials (banks, insurance companies, diversified financials). 

With this backdrop of potentially higher inflation and eventually, central banks tightening interest rates, a company we quite like is Computershare (ASX: CPU). It has huge cash balances.

It's a registry business that does a lot of corporate actions, and mortgage servicing as well. That leads to a lot of client money on its balance sheet and escrow accounts. It often earns interest itself on that cash.

When interest rates fell to zero, that had a real impact on its earnings, but it is one of the few companies that is positively leveraged to interest rates going up. They recently bought a business from Wells Fargo in the US which has actually pretty much doubled the size of those cash balances. So it's got real leverage to short term rates going up.

On the flip side, a company we're short, that a lot of people from the market are because it's so expensive, is Commonwealth Bank (ASX: CBA). It's the premium-quality bank out there with the best return on interest. It does a great job, it has the best operations, but it's trading on over 20 times — a very high price to book and a huge premium to the other banks. It's the best, but it's just not that good. The valuation's become too stretched. We see that as a good hedge, in terms of risk-reward.

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Ally Selby
Content Editor
Livewire Markets

Ally Selby is a content editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian Group, Your...

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