From 55,000 stocks to the chosen few: How to hunt for the world's best opportunities

At last count, there are more than 55,000 publicly listed companies across the globe. 

That is a wealth of opportunity in anyone's language and it begs the question, how on earth does anyone decide what and where to invest in? 

This is where the value of a fund manager really comes into play. Not only do fund managers each have an investment style that they pursue - whether it be growth, value, income, etc. - they also have a robust process for whittling down the plethora of available opportunities, to a portfolio of all-star stocks. 

It's no easy feat, either - as we all know. 

Fund managers need to have enough flexibility in their investment process to cater to changing market conditions and themes, but also be disciplined in their application of the process, to ensure they don't stray from their mandate, nor overreact when times are tough. 

To shed some light on this balancing act and to share some insights into their processes, host David Thornton was joined by Nikki Thomas, from Magellan and Adam Chandler from Claremont Global. 

Plus, they also outline the thesis on a high-conviction holding in their portfolios right now. 

Note: This episode was filmed on September 20, 2023. You can watch the video, listen to the podcast, or read our edited transcript.

Edited Transcript

David Thornton: Hello, and welcome to Buy Hold Sell. I'm your host, David Thornton. The global listed space is an enormous universe, about 55,000 companies thereabout. The question becomes, how do you filter that universe down to build a portfolio? To answer that question, we're joined by Nikki Thomas from Magellan and Adam Chandler from Claremont Global. Welcome, guys.

Nikki, let's start with a wide lens from one to five, one being cheap, five being expensive, how much value are you seeing in the global listed space right now?

How much value is there in the global listed space right now?

Nikki Thomas: I'm going to be totally annoying. I'm going to tell you there's lots of ones and lots of fives. As you say, 55,000 companies, we probably look at 200 to be honest, but in that 200, there's some that look really expensive and some that look extraordinarily good value. So that's our job.

David Thornton: So very bifurcated. Adam, one to five, how much value are you seeing?

Adam Chandler: I think three to four at the moment. Parts of the market are quite expensive, but yeah, definitely bifurcated is a good word. We're seeing pockets of value in certain areas and other areas, which are a lot more expensive.

The biggest mistake investors are making

David Thornton: Adam, I'll stay with you. What's the biggest mistake investors are making globally?

Adam Chandler: I don't want to be too presumptive here in terms of mistakes other people are making. We're just trying to avoid mistakes ourself. I guess one of the areas where we really try and focus on is the long term. So there are different timeframes, obviously, that different investors and traders have across markets. And that's where we see one of our biggest advantages, thinking about businesses for the long term and then looking to lean into those moments where people might be more concerned about the short term, that creates an opportunity.

David Thornton: Nikki, what mistakes can investors make when investing globally?

Nikki Thomas: I'd say quite similarly. I would just say the mistake I think people often make is they fail to do the work. If you don't do the work, what you tend to do is rely on prices and think that prices are indicating value or some information, and in fact, they're not. They're just giving you the opportunity to potentially buy something that's good value or to make a mistake. So doing the work, understanding the fundamentals, and that's hard, so that's why people don't do it.

From 55k to a portfolio

David Thornton: Nikki, how do you do the work? How do you get from 55,000 companies down to a portfolio of a handful?

Nikki Thomas: So we have a very structured process because it is about creating a particular outcome for our clients. We start with filtering the world and going, "We're only going to invest in really amazing quality companies." So we think about competitive advantage, we think about the best companies in the world. So there's a really structured process inside Magellan to find these amazing companies. And we don't even think about value until we've done that. And then we go and do the financial analysis. So we build models, we work out what the fundamental value of a company is, and then we find the margin of safety. And if it's good enough, we'll buy it.

David Thornton: Very rigorous. Adam, Claremont is renowned for being highly concentrated, about 10 to 15 stocks in the portfolio normally. How do you guys go about finding opportunities?

Adam Chandler: We start by screening out large parts of the market, which makes us a little bit different to the typical fund that's doing international where they do have more companies to choose from. So we take out things like banks, which have traditionally, particularly offshore, tended to destroy shareholder value. We take out oils. We're looking for companies which are really high quality, obviously, but with a sustainable competitive advantage. And that's a key focus for what we do. But then we're also looking for predictability. So if we start with say, 70,000-odd listed companies, through our filters, we pretty quickly bring that down by screening out those companies which aren't profitable, which might be too small, or which are in those industries that we've discussed. So we're quite selective in terms of where we're hunting for opportunities.

The most important metric(s)

David Thornton: Adam, what's the most important metric that you look at when picking new companies?

Adam Chandler: Oh, it's hard to distill it down to one. I think ultimately what we are looking for is to buy something for less than we think it's worth. That's what all good investors are trying to do, and that's where all of our information comes together. So, bringing together our understanding of the competitive advantage of the company and the valuation, and then comparing that to the price. And we do that every day for every company that we're looking at, and that's where we find the opportunities.

David Thornton: How about you, Nikki, what is non-negotiable in your process?

Nikki Thomas: Yeah. There's no one number, of course, otherwise none of us would have a job, but I think we focus on two things, and they're very similar. We are looking for moats, so we've got to find those economic moats. We've got to find those competitive advantages. And secondly, we're looking for how we can generate and what the return we will generate over a three-year horizon or longer. So it's thinking about, what do we think this business will be worth and where will it be trading in three years' time at a minimum, maybe further out. And then whether that gives us the compound return that is creative to our target that we deliver in terms of absolute return to clients.

Adam Chandler: Now, we've asked our guests to bring along one high-conviction pick. Nikki, what's your high-conviction pick for us today?

Mircosoft (NASDAQ: MSFT)

Nikki Thomas: It's a bit boring because I suspect everybody feels this stock is one of the most advantaged amazing businesses out there, but it's Microsoft. It's a top position in the global strategy. It's a top position in a high-conviction strategy. This is an incredibly advantaged business that has two massive tailwinds behind it. One is the shift to the cloud and the amount of trend compute that's going to happen in the cloud over the next 20 years continues to be growing at a double-digit rate. They're one of the three large hyperscalers, number two behind Amazon.

And then the piece that's I think still not captured in prices, there's been a little bit of a rerate, but there's a really big opportunity coming around the innovation they've done against their subscription business, what they're calling Copilot. And this is using generative AI to help you do your job in Excel or Word or Teams. And there is a massive monetization opportunity that lies ahead of them that we mightn't see for another year or so. But when it happens, it's going to be, I think, extraordinary. So this business is superbly positioned and looks like it can deliver some very strong returns.

David Thornton: Adam, I know Claremont also likes Microsoft, but Nikki got in first. What else have you got for us?

Adobe (NASDAQ: ADBE)

Adam Chandler: Yeah. Look, it's a great company. There's no doubt about that. On a similar vein, slightly different, is Adobe for us, which if you have Microsoft, which if you think about tools for knowledge workers, it's financial analysts, it's very hard to do your job if you don't have Excel sitting there. I think we're all lost without it. Adobe provides those tools for creatives, so if we think about Photoshop or Illustrator.

And it's a very small cost for those people in terms of doing their day-to-day job, you might pay $20 a month or $60 a month for the family of apps, but absolutely crucial to what you are trying to do. And we're in an environment now where digital media is just becoming greater and greater and we're all seeing more content. And what Adobe allows people to do is create that content.

David Thornton: Two high-quality companies to be sure. Well, that's all we have time for today. If you enjoyed that episode of Buy Hold Sell, please give it a like and be sure to subscribe to our YouTube channel where we're adding more content like that every week. We'll see you next time.