Claremont Global head Bob Desmond says he learnt the importance of investing in quality companies when growing up in Zimbabwe during a time of hyperinflation.
“What I learned from that is no matter how bad economies get – and things got really bad in Zimbabwe – high-quality businesses which have high margins, strong balance sheets, strong cash flows and are capital-light can be very resilient,” he said in an interview with The Australian.
“I grew up in a world which was very uncertain, so I don’t try to predict the future."
“I just try to buy the highest-quality businesses. So, no matter what happens, you can protect capital for your clients.”
Desmond, who worked in London before moving to Australia in 2008, is making his first appearance at the annual Sohn Hearts & Minds Investment Leaders Conference, where fund managers give their favourite stock tips to raise money for medical research charities. The conference, which is now back to being held in person, will be in Hobart for the first time on Friday November 18.
Desmond oversees Claremont Global, a $1.2bn international investment fund which focuses its investment on 14 global companies, including LVMH, Nike, Visa, Alphabet, Microsoft, Adobe, Equifax and CME.
Desmond says he will recommend the one which is best priced at the time.
“We’ve got a small number of stocks which are all global leaders in their industry,” he says.
“They have higher than average revenue growth, higher than average margins, strong balance sheets and cash flow, good capital allocation by management and an understanding of their competitive advantage.”
The fund deliberately excludes investments in banks as well as companies in insurance, resources, oil and pharmaceuticals.
Desmond says his approach to investing is to not try to predict economic and market cycles.
He believes investors should give up pretending that they know what is going to happen to economies and look at the underlying quality of companies.
“I don’t know anyone who told me that the Fed would be as aggressive as it has been on rates this year,” he said.
“No one told me that there would be a pandemic and that governments would respond with a big amount of fiscal and monetary stimulus.”
Australian investors, he points out, would also have been misled had they banked on the comments by the Reserve Bank that it was not expecting to raise interest rates until 2024.
“The future is inherently unknowable,” he says.
Claremont, he explains, looks for companies with growth opportunities, and never buys a stock just because it is cheap.
Desmond likes high-quality companies as they can ride out economic cycles.
Luxury brand company LVMH, which owns a range of global brands including Christian Dior, Sephora, Moet & Chandon, Krug, Hennessy, Fendi, Givenchy and Bulgari, is growing strongly despite talk of recession.
While its sales in China are down, because of the downturn in its economy, the company is seeing strong growth in the US.
“It’s a really strong line-up of brands and amazing management which has been in place for more than 30 years,” Desmond says.
Visa, he says, is benefiting from the resumption of global travel.
Despite concerns about the prospects of a recession, Desmond says consumer spending is still holding up well globally.
He believes that good brands will outperform in a downturn.
One less well known company he holds is Zoetis, the world’s largest producer of medicine and vaccines for animals and livestock, which was spun off from Pfizer.
Desmond sees the company’s growth driven by increasing spending on pet care.
Claremont has a global watch list of about 120 stocks, with an approved list of about 40.
Unlike some other funds focused on international investing, such as Platinum Asset Management and Magellan, Claremont has avoided any investment in Chinese stocks.
Desmond says he looked at investing in e-commerce giant Alibaba but decided against it because of the uncertainty over shareholder protection for Chinese stocks.
Most of Claremont’s stocks are based in the US, a market where he says there are still good global companies that are undervalued compared to their peers in Australia and Europe.
Desmond says another lesson he has learned in his investing career is to “try and be more of an optimist” when it comes to the sharemarket.
“I’ve always been on the bearish side of life,” he says.
“The Asian crisis was pretty scary, the dot.com crisis was scary, the Global Financial Crisis was petrifying. And then we had Brexit and Trump and Covid-19.
“These events have all happened. But what has come out, over time, is that if you buy good businesses, their earnings are growing and you take a long-term view, you are going to get a good return from your investments.”
The Sohn Hearts & Minds Investment Leaders Conference is an annual one-day event which brings the investment community together in support of Australian medical research.
It was held on Friday 18 November, Sohn Hearts & Minds in Hobart, with support from the Tasmanian government.
This article was originally posted by The Australian here.
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