‘Shiny new things’ not in our wheelhouse, says high-conviction investment team

While millions of investors across the world are willing to ride their luck on some of the highly priced technology companies behind artificial intelligence, high-conviction investment teams that have a strong strategic foundation are staying the course – even if that means taking a hit on returns in the short-term.

The recent surge from Nvidia has sent benchmark returns soaring, with those who’ve eschewed this current market darling typically falling behind those benchmarks. Shares in the California-based graphics processing unit maker have increased by almost 3,000 per cent, with Nvidia’s market capitalisation sitting at about $US3 trillion on the Nasdaq.

It has been a giddying ride for holders of stocks like Nvidia, but for those on the sidelines, there is a temptation to feel as if they’ve missed out, or – even worse – to feel as if they should buy into the latest market trend.

That notion, however, is anathema to high-conviction investment teams like Claremont Global, who believe in carefully curating a portfolio of business holdings that promise stable growth minus the kind of volatility seen in these thematic based stocks.

“Our objective is to curate a portfolio comprising no more than 15 of the highest-quality businesses in the world,” says Claremont portfolio manager Bob Desmond. “These are rare and difficult to identify, but we trust our rigorous process that focuses on long-term stability and a deep understanding of a company’s business drivers, competitive advantage, approach to capital allocation, earnings growth profile and valuation.

The average age of the businesses held by Claremont is more than 80 years, which attests to the kind of companies they’re looking for, proven and stable with a solid earnings profile and strong balance sheets. More mature companies also provide essential data for a more predictable earnings trajectory, which facilitates accurate valuation forecasts.

There’s nothing wrong with companies like Nvidia, whose rise has been phenomenal and whose owners have benefitted. But these kind of holdings just don’t fit the high-conviction profile, and investing in them would detract from Claremont’s own proven method.

“Investors understand the reason to buy our fund is that we prioritise our process over everything,” Desmond said. “Owning companies like Nvidia due to short-term performance purely to keep up with benchmarks deviates from our process. Our investors don’t have the appetite for that level of volatility, and neither do we.”

“Companies with sudden spikes in earnings are hard to model, predict and value,” he continued. “That’s why we focus on long-term, consistent and repeatable earnings performance – volatile  earnings are not what we look for.”

That consistency and discipline, Desmond explained, is ultimately what the manager’s clients are looking for.

“This is also why, despite offering daily liquidity, our fund is experiencing remarkably low redemption rates despite recent underperformance,” he said. “Our investors understand and value this approach which has delivered outperformance in the top 2 per cent of funds globally over the last decade.”

Tahn Sharpe

Tahn is former managing editor across The Inside Network's three publications.