Why quality matters even more when markets are fully priced

"The way I think about it is like Tour de France. 

You don't have to win every stage, but you're trying to win the whole tour".

That’s how Bob Desmond, Head of Claremont Global and Co-Portfolio Manager, explains his approach to global equity investing. It's a philosophy forged through three decades of market experience, countless cycles, and a deep commitment to quality. 

Right now, the Claremont Global Fund is underperforming on a relative basis - a frustration for any investor - but Desmond is anything but rattled. Of course, it also helps if you’ve got a long track record and history of outperformance already in the bag... that tends to soften the blow of any short-term relative underperformance.

In this candid conversation, Desmond acknowledges the market's current infatuation with momentum and risk-on assets, which has left many quality-focused managers trailing the benchmarks. But he remains steadfast, anchored by a consistent process and a long-term track record of delivering 8–12% per annum returns with capital preservation at the core.

He also reflects on broader market conditions, warning of stretched valuations, compressed credit spreads, and the dangers of short-termism. Despite these headwinds, Desmond believes now is a good time to be a quality manager, noting; 

“You are able to buy a portfolio that is demonstrably better than the average market, but you're not having to pay a premium for that.”

The discussion ranges from key portfolio metrics, including the Claremont portfolio’s impressive 61% gross margins and 20% return on invested capital (ROIC), to the team’s valuation discipline and approach to navigating market uncertainty. 

Desmond also shares insights from a recent five-week research trip, where he and Co-PM Adam Chandler visited 70 companies across the US and Europe, offering fascinating on-the-ground observations about sentiment, policy impacts, and emerging investment opportunities.

INTERVIEW SUMMARY

Sticking to the strategy amid short-term pain

Desmond began the conversation by addressing the recent underperformance of the Claremont Global Fund, attributing it largely to the market’s current preference for momentum and risk-on assets. 

“This industry’s an interesting one, Chris – one day you’re a hero, next day you’re a zero,” he quipped. 

“We are in markets that are quite strongly trending momentum. It is very much risk-on. The companies that we own are performing all pretty well… but people don’t want quality and quality has de-rated.”

Despite the headwinds, Desmond remains confident in Claremont’s long-term strategy. 

“We are still top decile over a decade, so we know this works over the long term. We've achieved our investment objectives of 8 to 12% per annum over every meaningful timeframe.”

Navigating uncertainty by focusing on process

Desmond stressed that attempting to forecast macroeconomic shifts is a fool’s errand. Instead, Claremont focuses on process over outcomes. 

“If you start investing looking at the outcome, you can get into a very dangerous place,” he said. 

He likened the strategy to winning the Tour de France: “You don't have to win every stage, but you're trying to win the whole Tour.”

To manage risk, Desmond emphasised the importance of knowing valuations, maintaining discipline, and never lowering the quality hurdle. “Stay focused. Stay in your lane. Know your valuations of your companies, know the competitive advantage, and don't just get sucked into a whole lot of areas of the market where you have no edge.”

Quality at a discount

Claremont's focus on high-quality companies is reflected in its portfolio metrics. Compared to the S&P 500 ex-banks, Claremont’s portfolio boasts a 61% gross margin (versus 35%), 31% operating margin (versus 13%), virtually no debt, and a 20% return on invested capital (versus 10%).

“Despite that quality premium we have, you're only paying one point more for our portfolio versus the market. That's the bit I like most. 

So you're not having to pay up for that quality, and that's kind of like a bit of a free lunch.”

While the valuation gap has fluctuated over time, Desmond explained the importance of communicating these shifts to clients. “In 2021, the fund was up 44%… we were saying to our clients, do not invest in the fund. This is not normal.” 

By contrast, 2022 offered a rare opportunity. “We were saying to our clients, this is actually a good time to lean into the uncertainty.”

On-the-ground insights from a global research trip

Fresh off a five-week tour visiting 70 companies, Desmond shared a series of key takeaways. 

“The US economy felt very solid. Despite all the headlines we have here, it is quite good to just get out there.”

His anecdotal observations - from Uber drivers - revealed a country that still believes in the American dream. He also found surprises in booming economic activity in Indiana, a so-called flyover state with just 2% unemployment and strong business investment.

Desmond noted: “We sometimes get swept up into the politics and actually it’s important as a business owner to remember you own businesses.”

Risks on the radar – and why quality still matters

The most consistent concern from company meetings was tariffs. 

"Tariffs are probably the main one. Everyone's thinking they're going to be rolled back but that is still a risk.” He also flagged the pressure on lower-income consumers.

As for why it’s a good time to be a quality manager, Desmond pointed to market valuations and risk metrics. 

“Markets are expensive, the VIX is very low. Spreads are tight.” 

In his view, the potential reward in markets right now is slim relative to the risk. However, Claremont’s portfolio still offers value: 

“It normally trades around a 50% premium to the market. It's now at a 15% premium. So we think the fund can get clients to that 8 to 12% per annum.”

While short-term momentum may be working against them, Bob Desmond and the Claremont Global team are staying true to process. 

With a consistent process, rigorous quality standards, and a portfolio that offers strong fundamentals without a hefty valuation premium, Desmond believes patient investors will be rewarded. After all, you don't have to win every stage – just the Tour.

A global portfolio of 10-15 quality growth businesses for the long term

Claremont Global is a high conviction portfolio of value-creating businesses at reasonable prices. For further information, visit their website or fund profiles below.

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Claremont Global Fund (Managed Fund) (CGUN)

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