How to do well in a tough year

This year has been tough for investors, we know that.  And it makes sense that doing well when things are so tough brings greater satisfaction than galloping to profits in less testing circumstances - 2021, for example, with its wind-at-your-back-every-post-a-winner vibe. 

That's how Bob Desmond, portfolio manager at Claremont Global, sees it, at any rate. 

"Last year was an easy market in a way you had great tailwinds for the fund, and I think we did, I don't know, it was 46% at the end of the year. But ..
To be honest, I've actually been happier with how the funds performed this year. I mean, obviously a much, much tougher market. 

According to Desmond, the key is "value discipline on quality growth," discipline that at times had Claremont on its toes. Additionally, the predictability of earnings, a core reasoning behind the absence of oil and energy companies in its portfolio, played its part

In this wire and video, Desmond gives us an insight into the success of Claremont’s fund performance and how labour market shortages play into their outlooks.

Key takeaways: 

• Quality is the secret to their fund’s successful performance in 2021
• Why predictable earnings are so important for Claremont’s portfolio 
• The companies to weather concerns on global high-quality talent squeeze
• Three good entry points Claremont had for additions to their fund

Edited Transcript

What was the secret to a strong 2021 for fund performance?

Bob Desmond: Yeah, well, we obviously had a great year last year. But last year was an easy market in a way you had great tailwinds for the fund, and I think we did, I don't know, it was 46% at the end of the year. 

So it was a good year. To be honest, I've actually been happier with how the funds performed this year. I mean, obviously a much, much tougher market. 

Markets are down. But for us ... just having that value discipline on top of the quality growth (has been effective).

I think we got to the end of last year and I felt very uncomfortable because some of the stocks in the portfolio were touching up against our sort of valuations, and so obviously we're looking to recycle capital, but it wasn't obvious what we could recycle into because you had two parts of the market. 

A lot of the businesses we love were still at very, very high valuations, or you could go down the other path and sort of buying more value-type businesses, but were you getting into a value trap? 

We look really closely at say something like Facebook and decided that the ESG and the governance and the business model wasn't for us, but it was looked on the surface, really cheap. So it was a very difficult market to be in.

 Recently, I mean, I think we are a couple of percent behind the benchmark, but we have no oil. So I think that's a pretty good result. 

None of our businesses has blown up. We had a very, very good Q1 earnings, probably the best we've ever had.
So I think having that for us, having the value discipline this year has really, really paid off. I think.

Why are there no oil or energy companies in Claremont’s portfolio?

Bob Desmond: If there's only 10 to 15 stocks in the portfolio, it goes back to what you said at the beginning around predictability of earnings. So to get the oil piece right, you have to get, well, the earnings, you have to get the oil forecast right. 

It kind of goes back to 2014. I think it was, we owned Schlumberger in the fund, which every expert told us that oil was going to stay above $100, and very quickly it was down at 50 or 60. I can't remember with the advent of Shell Oil. It kind of was just such a good lesson to me that if those guys who's studying the oil market every single day, are all experts talking to everyone in the market and they all got it wrong, we've got no edge there. 

I think the other thing as well is with Australian investors, they have more than enough exposure to resources and oils and banks and all those other things. 

We've always been an Australian add-on portfolio. We are never going to own banks or resources or oils, but it just goes back to the predictability of earnings, and it's very hard. Who predicted that Russia would invade Ukraine? It's very, very hard.

Has the pandemic crimped high-quality talent and margins?

Bob Desmond: We've seen it definitely in our earnings calls with companies. I mean, there has been the cliche war on talent and you're seeing it affecting margins, potentially affecting more stock issuance. So it is impacting margins. 

But across the portfolio, average margin is 27%. So we can weather that, but you've definitely seen it, especially some of the, IT places, the IT services companies, the banking software businesses, but then we have other bits in the portfolio that benefit through it - something like ADP or an Aon, which have human resources businesses. 

They're really benefiting from that because companies are so desperate to build a talent pipeline and retain talent. So it hasn't been a major thing, but it's noise in the background.

Across the portfolio, average margin is 27%

What are your thoughts on valuations at the moment?

Bob Desmond: In terms of valuation, I feel we've probably had three really good entry points into the fund. December '18, we picked up two businesses in December 2018, which were LVMH and Equifax. Then COVID was obviously a great entry point. 

We picked up Sherwin-Williams and Microsoft, and then now I think we're getting a pretty good entry point. We've picked up Adobe and LVMH again. So this volatility is good for us. 

If I look at the weighted P/E across the fund, it sits at the moment around 22 times, which is pretty much in line with its long-run average. Not that long ago, the fund was at 29 times earnings. So yes, there's lots of uncertainty, but the valuation's so much better. It's basic maths.

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Claremont Global invests in a portfolio of 10-15 quality growth businesses for the long term. To learn more, please visit their website or the fund profile below. 

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