3 top stocks from the best-performing equities manager on Livewire over the past 5 years
Last week we published a list of the most-viewed funds on the Livewire platform in 2022 and promised to have a conversation with the head of the most-viewed fund overall.
The most-viewed fund was Claremont Global Fund and the Head of Claremont Global is Bob Desmond. For those unfamiliar with Desmond, he has almost 30 years of experience in financial markets, having worked in Africa, London, and Sydney, and he was featured on Livewire’s Rules of Investing podcast in October last year.
As well as being the most-viewed fund in 2022, with over 3000 views, Claremont Global Fund has the distinction of being the best-performing equities fund, with either a domestic or global focus, on the Livewire platform over the past 5 years. Despite the compelling performance, Desmond remains humble and dedicated to his tried and tested investment process.
A man after my own heart, Desmond is a pure stock picker, unfazed by the whims of the cycle. He resolutely refuses to chase fads and trends, in the belief that if you can identify the right companies with the right characteristics, they will hold up over time. It’s a strategy that is not for the faint of heart, and it requires intense discipline - a discipline that all investors should aspire to. In his own words;
“It's not a secret sauce that we have, I think we try and be really disciplined in our execution of [the process] but there's no secret sauce to it”.
In this wire, Desmond very kindly provides insight into his process, identifying the factors that he uses to whittle down the 40,000-odd globally listed companies (according to the OECD) to the 10-15 that make it into the Claremont Global Fund, and what characteristics he looks for in a quality company. Desmond also provides three examples of companies that Claremont likes right now.
All about the process
When asked about the elements of the Claremont Global process that are critical to long-term investment performance, Desmond highlights the following three;
1. The focused nature of the portfolio: “it's only 10 to 15 names, so we do try and concentrate our capital in our best ideas", says Desmond.
"I think good investment ideas are rare and you should concentrate capital in those ideas".
2. We know what we don’t know: “The second thing that's a key part of our process is that we, I hope, know what we don't know. We try and stay away from things we don't really understand that well, or we don't think we have an edge in. That would be things like commodities, oils, banks, pharmaceuticals.”
"Anything that we say is commoditised, regulated, leveraged, complicated, we'll just stay away from. And that references back to the first point of having only 10 to 15 names".
3. Valuation: “The third part of the process is valuation, and I think we've stayed disciplined in our valuation techniques. We try to use inputs that are through the cycle. For example, when the bond rate dropped down - I think it was to 0.5% - we didn't drop all our discount rates only to take them back up a year or two later. I think you can get into trouble when you start inputting into your valuation interest rates that are at multi-century lows.”
Desmond also notes continuity in his team as a driver of long-term performance, saying "we've had a very stable team over the last five years”.
When asked about how he and his team get from 40,000 global stocks to the handful that make it into the portfolio, Desmond was forthcoming. One of the key metrics that the fund screens for is return on tangible capital that averages more than 15% over a decade.
"Once you apply that filter, you're going to take out a whole heap of stocks".
What exactly is return on tangible capital? Return on tangible capital shows the return on the actual operating capital that is employed in the business (i.e. excludes the goodwill/intangibles from acquisitions).
Desmond notes that a company must also have a minimum market cap of $3 billion, but in practice, it's more like $10 billion.
The fund does not invest in emerging markets. On this, Desmond offers real-life insight;
“Having grown up in an emerging market, I think investors are best served by people who are actually on the ground and focused exclusively on that. I think you have to really be on the ground, so we stay away from those”.
True to his words above, Desmond stays away from industries where he doesn’t feel the team has an edge, namely commodities and banks, and he also will avoid anything with an untidy balance sheet: “We don't want to have debt to EBITDA over two and half times for the businesses that we own. We might stretch a bit higher than that if the company's made a good acquisition, a sensible bolt-on acquisition. But as it stands today, the portfolio's almost net cash and our balance sheets are really strong.”
Applying all of those factors, the Claremont Global Fund’s investible universe shrinks to around 100-120 stocks, says Desmond.
"We have a watch list of about 100 to 120 stocks that we follow constantly, and from that we build an approved list of around 40 names".
As noted above, Desmond is a pure stock picker, so asking him which stocks have contributed to the fund’s performance over the past five years and which stocks he likes right now was a burning question.
Before we dive in, Desmond notes that there are some common attributes and groupings of the stocks in the portfolio. More specifically, Desmond notes what he calls “tech staples”, that is, names where “the technology is proven, it's highly profitable, strong balance sheets, good track record, proven market dominance. So those would be Microsoft (NYSE: MSFT), Alphabet (NASDAQ: GOOGL) and Adobe (NYSE: ADBE)”.
The team also “love brands, and generally higher-end brands”. Nike (NYSE: NKE) and LVMH (EPA: MC) fit that bill. “Digital” is cited as another attribute, with Visa (NASDAQ: V), Alphabet and Adobe in that group, whilst “trusted advisors” is the final attribute that Desmond cites.
“Aon (NASDAQ: AON) is a trusted advisor to businesses in helping them solve their insurance needs or human capital needs. Automatic Data Processing (NASDAQ: ADP) is a trusted advisor to businesses in helping them solve payroll problems and also human capital needs”.
"Generally we like those types of businesses, and those are the sectors you're going to see us in consistently over time".
As for the stocks that have been the most meaningful contributors over the pasts five years, Desmond highlights Alphabet, Visa and CDW (NYSE: CDW).
“CDW we sold a couple of years back, a very good IT services business. We sold that on valuation grounds. We still own Alphabet and Visa".
Desmond notes that the fund topped up Visa “slightly over a year ago when there was a lot of concerns around disruption, around crypto, around Amazon, the cross-border recovery. That was a good opportunity for us to top up Visa.” As for Alphabet, Desmond says “we're always topping up when we have opportunities, but just very much at the margin, it's been one of our biggest holdings consistently for five years.”
As for what Desmond likes right now as the three biggest holdings in the fund, he nominates Nike, Visa and STERIS (NYSE: STE), and provides the following summary of each;
Nike: There are lots of reasons to love this company. It’s an exceptional brand that completely dominates the sporting landscape. If you actually look at what's going on in the business, they can increasingly take control of their distribution, both online and through their own stores. Obviously, that's great for the business because they get the margin that's associated with that, but I think more importantly, they control at the point of sale and they get all the data benefits that come with that, so that deepens competitive advantage. So that's a key issue.
Visa: Naturally, their business is just going to grow with personal consumption expenditure (PCE), so that's 4-5%, but there's still the ongoing cash-to-card conversion. The online business is terrific for Visa, the capture rate there on transactions is three times higher than it would be in the physical world. But they're also generating a whole load of new flows. Traditionally Visa was a C2B company. Now, for example, you can go B2C, so an Uber driver could get paid by Uber on card. There's person-to-person payments, there are government-to-person payments. Increasingly they're getting involved in B2B payments. There are cross-border payments. In the old days, Visa was credit cards. More and more, we think of Visa as just a network of networks where you can move money in whichever fashion, whichever mode, around the world. It’s a key holding, trading around 26x consensus earnings. We still think capable of mid-teens growth.
STERIS: A healthcare company. In healthcare we only play in selected places. We stay away from things like pharmaceuticals - very complicated, very regulated. STERIS is a medical services business, providing sterilisation for hospitals, medical devices and pharmaceutical companies. We'd say their organic growth is going to be mid-single-digit to high single-digit. We also estimate low double-digit earnings growth. We think at 22x consensus earnings, it will be a very good performer over the long term.
Constantly looking for an edge, staying focused
Not everything goes to plan all of the time, and Desmond has a process for evaluating stocks that don’t perform as expected.
At the heart of it, the team say, “let's assume that this never happened, would we still want to own the business? Are we prepared to top up the position?" If the answer to that question is ‘no’, then capital gets redeployed. That was the case for Ross Stores (NYSE: ROST), a US-based discount chain store that struggled through Covid as it had no online presence, and then had to endure supply chain pressures and margin crunch thereafter. Desmond and his team exited the position and rolled the capital into Nike, LVMH (owner of Louis Vuitton), and Adobe.
At the conclusion of our conversation, I asked Desmond why he thinks Claremont Global Fund was the most-viewed fund on the Livewire platform in 2022. A tough question, perhaps, but Desmond took it on and talked to transparency and a “clear, simple message” as the most likely factors.
“We know that our 10 to 15 stock portfolio won't appeal to a lot of people but I think certain audiences really like that, I think it's simple and easy to understand. Those would probably be the key things.”
The Claremont Global Fund has a strong identity, with Desmond at the helm, which has translated into long-term performance success, and the most-viewed fund on Livewire in 2022. I will leave you with the following excerpt from the interview, in Desmond’s own words, that I think encapsulates what he and Claremont Global are all about.
“At the end of the day, what we do is nothing that you won't find in a business textbook or a Warren Buffett biography. It's not a secret sauce that we have. I think we try and be really disciplined in our execution of it, but there's no secret sauce to it. Being transparent is hugely important. We want our clients and potential clients to understand how we build a portfolio together. We want them to understand the qualities of the businesses they are invested in, and how the portfolio is likely to react in different types of markets. We've had clients in the fund who've been there over a decade and what ends up happening is that once they understand the process, they understand us, they understand the stocks, and that builds trust.”
Look inside the Livewire readers most popular fund for 2022
Bob and the team at Claremont Global run a high conviction global portfolio of 10-15 of the world's highest quality growth businesses. For further information, please visit their website or the fund profile below.
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My passion is equity research, portfolio construction, and investment education. There are some powerful processes that can help all investors identify great opportunities and outperform the market, and I want to bring them to life and share them...