Yet appearances can be deceiving. This town is headquarters to Jack Henry & Associates, a US company that has provided financial technology solutions to regional banks, credit unions and fintechs since its founding in 1976. Capitalised at $18.1 billion [2], Jack Henry has just been added to Claremont Global’s portfolio of no more than 15 growth businesses.

This financial technology company is an example of Claremont Global’s “high conviction” approach to stock selection – building a focused portfolio of 10-15 businesses, one business at a time with no reference to a sharemarket index.

High conviction investing typically centres on the principle of concentration rather than diversification across a broad range of sectors and companies. Investors who adopt this strategy typically allocate a material portion of their portfolio to a limited number of stocks or assets. The rationale behind this approach is the belief that with enough knowledge and insight, one can identify a few exceptional investment opportunities that may outperform the market.

In the case of Claremont Global, we maintain a “watch list” of about 200 global companies, which gets whittled down to about 40 businesses that make it to its “approved” list. These 40 companies are then researched over long periods of time to get a complete picture of each business, and the industry in which it operates. 

Claremont’s research process involves company visits, conference calls, calls with ex-employees and competitors, and discussions with industry specialists. Through this process, the belief is that a high-conviction fund can deduce ideas about the companies that could potentially deliver risk-adjusted returns that meet its goals.
 

Risks with high-conviction investing

The obvious risk is that with a more concentrated portfolio a mistake is amplified. This can result in higher volatility or the risk of greater losses (relative to a more diversified portfolio) because the performance of a few investments can have a disproportionate impact on the overall portfolio, leading to larger fluctuations in value.

A way that Claremont tries to mitigate this risk is by only investing in businesses that we believe have stable business models, competitive advantages, low levels of debt and predictable earnings streams. This approach never eliminates the risk, but Claremont believes it can potentially help to minimise it.

There is another angle to this. We believe the more diversified a fund, the less likely it is to outperform the market. 

In fact, there are very good investment vehicles that are very diversified – index funds – and they never beat the market, they aim to track the market index. So, while Claremont Global believes investors should diversify across asset classes, the extent of diversification may differ within an asset class.

Even within an asset class, a high-conviction fund, while being concentrated in a relatively small number of companies, can be diversified by customer, geography, industry sector and ultimately earnings drivers.
 

What high-conviction investing entails

[Editor’s Note: Do not read the information below as a recommendation for portfolio construction and maintainance, or on the timing to buy or sell. This information outlines the approach of Claremont Global, a professional investor with long experience in high-conviction investing in global equities].

With high-conviction investing, an investor needs to be extremely disciplined, whether buying or selling. They also need to take into account other factors, such as how much of the portfolio to allocate to the stock.

In the case of Claremont, one of our inputs is reflected in a stock trading ideally at a 20% discount to our valuation for it before being added to our portfolio, with an initial weighting in the portfolio of between 3-4%. 

If our thesis for buying proves correct, then the stock can be added to the Claremont portfolio up to a maximum weighting of 10%. 

With the sell decision, Claremont’s strategy is to exit immediately if the original idea for buying is wrong, trim our position in the stock as the discount narrows, and ideally exit at a 20% premium to value. 

It’s always hard to part with a winner. It’s even harder to sell a loser, the temptation always being to hold on until it is at least breaking even. This is where discipline and process are so important.  

There’s another aspect to this - turnover. Some investors regularly turn their portfolios over – a trading mentality, as they flit from stock to stock. Aside from the obvious cost and tax factors inherent in this approach, in Claremont’s view, it’s the antithesis of a high-conviction investment philosophy that looks to find and hold quality stocks for the long term.

In Claremont's view, the 'quality stocks'  means businesses that are resilient, even in difficult times. They should  have higher profit margins, more predictable earnings underpinned by organic growth, stronger balance sheets, lower levels of debt, and ideally be acquired at fair prices. 

The average age of a company within the Claremont Global Fund is over 80 years old. These stocks have witnessed a wide variety of economic conditions and geo-politics over that time.
 

Other traits of high-conviction investing

There are two other disciplines inherent in a high-conviction approach. First, ignoring the market theme of the day, whether it be the current interest in artificial intelligence, or previous trends such as medicinal cannabis, driverless cars or buy-now-pay-later. Sometimes this selectiveness comes at a short-term cost to a portfolio, but these trends can reverse over time.

Second, high-conviction investing ignores the macro-economic story, whether it’s based on the geopolitical situation, monetary policy, government policy, or commodity prices. Companies in a high-conviction portfolio are there precisely because they have demonstrated over long periods of time that their earnings are resilient in any economic scenario. Although their prices might dip in short-term market downturns, for the high-conviction manager, that’s potentially a buying opportunity. 

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[1] See https://www.cityofmonett.com/
[2] At 18 June 2024. Source. Google Finance

DISCLAIMER

This article has been prepared by Claremont Funds Management Pty Ltd, the Investment Manager (ACN 649 280 142, ABN 38 649 280 142, CAR No. 001289207) for the Claremont Global Fund (Managed Fund) (ARSN 166 708 792) (CGUN.ASX) and Claremont Global Fund (hedged) (Managed Fund) (ARSN 166 708 407) (CGHE.ASX). This information is for educational purposes only, does not constitute financial advice and is not to be regarded as a securities recommendation.  It has been prepared without taking into account your objectives, financial situation or needs and should not be used as the basis for any investment, financial or other decision. Before making any financial decision you should consult a suitably qualified financial adviser. 

This article may contain statements, opinions, projections, forecasts and other material (forward-looking statements), based on various assumptions. Those assumptions may or may not prove to be correct. The Investment Manager and its advisers (including all of their respective directors, consultants and/or employees, related bodies corporate and the directors, shareholders, managers, employees or agents of them) (Parties) do not make any representation as to the accuracy or likelihood of fulfilment of the forward-looking statements or any of the assumptions upon which they are based. Actual results, performance or achievements may vary materially from any projections and forward-looking statements and the assumptions on which those statements are based. Readers are cautioned not to place undue reliance on forward-looking statements and the Parties assume no obligation to update that information.