How this quality global manager is still finding opportunity in today’s market

Despite the S&P 500 recording a second straight quarter of EPS declines and a flurry of negative earnings guidance, Claremont Global's Bob Desmond is leaning in and looking through volatility to find quality companies trading at attractive prices.

Having said this, Desmond also admits that the Claremont Global "shopping list" is quite small, with only two stocks that interest the team at the moment. And no, NVIDIA is not one of them.

Note: This interview was taped on Friday 9 June 2023.

EDITED summary

Ask Desmond what kind of an environment he thinks we are in and he'll give you a classic and frank response.

"I'm not sure what kind of environment we're in actually, Hans," he quipped. "We don't try and pick things in the environment we are in."

What is clear to him - and anyone else who has watched the US equity market over the last six months has been the split between big tech and everything else.

The so-called AI basket has outperformed the S&P 500 by double digits. Desmond is not on the AI trade (bar long-standing investments in Microsoft, Alphabet and more recently Adobe) but he says the divergence in performance has created opportunities to pick up quality stocks at lower prices.

"Generally stock picking gets easier when you get bifurcation in the market. So you get people busily buying one part of the market and selling others and we quite like it when you get that dispersion," Desmond said.

"We've definitely seen more opportunity open up."

And yet, Desmond says that the Claremont Global shopping list is actually very short. The fund is in the process of buying one consumer stock and has only two more stocks on its radar. 

"I would say at the moment there are probably two we could add to the portfolio, but they're not really going to bring anything in terms of portfolio diversification, quality or value uplift. So it's not super long, but within the portfolio, there are a couple of opportunities we can see and we have been taking advantage of that in the last few weeks," he said.

Also unusual for an equity fund in this environment, Desmond and the team are nearly fully invested. The Claremont Global Fund has only 4% in cash. 

"4% cash is actually a signal we are still seeing opportunity. We ended 2021 with close to our maximum level of cash and then deployed that in 2022 as valuations opened up," he said.

"Did you know anyone in December 2021 who said interest rates were going up 500 basis points and you know how much time was spent analysing all of that by all the gurus in the world, and they all got it wrong," he said.

Finding opportunities in specific sectors

With this all-weather thesis in mind, Desmond says the team tends to find its best ideas in six sectors with individual investment dependent on valuations. 

• Financial plumbing - Visa (NYSE: V)
• Business services - AON (NYSE: AON)
• Consumer brands - Nike (NYSE: NKE) and LVMH (EPA: MC)
• Healthcare services - Agilent Technologies (NYSE: A) 
• Technology - Microsoft (NASDAQ: MSFT) 
• High-quality industrials

"That's kind of all we'll ever own. So generally where we go is not dictated by themes, it's dictated by valuation. We only follow about 150 companies worldwide," he added.

The largest holding (as of writing) is Microsoft. 

"We've had to keep taking the top off it because it keeps going through our maximum 10% breach and then we have to take the top off it," he said.

Recent highlights from corporate visits to the US and Europe

Desmond also shared some insights from his recent tour of the US and Europe. The biggest thing he noticed was the difference in how much things cost. 

"Just day-to-day things, eating out, getting a coffee, etc. That was quite a surprise to me. So all that money printing obviously ended up somewhere," he said. 

Much like every other major economy, inflation and labour shortages continue to impact Main Street. And despite consumer confidence sitting at recessionary levels, spending intentions are anything but.

"There's still an excess of savings built up and you can see that in companies like Visa and MasterCard (NYSE: MA), and American Express (NYSE: AXP)," he said.

"The Hilton Hotels (NYSE: HLT) CEO was at a conference and said every week they look at it and they can see absolutely no cracks. American Express can see the travel bookings out three or four months. So I think the consumer's still in very good shape." 

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

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