Quality Equities: The Solution to Today’s Equity Conundrum

Executive Summary
Ten years into a bull market, the conventional wisdom is that U.S. stocks are richly valued based on most well-cited metrics. Fortunately, solid investment opportunities remain in places that some value investors may find surprising. This is why the GMO Quality Strategy remains fully invested in equities. We invest globally, yet the portfolio holds primarily U.S. domiciled companies. Nearly half of the portfolio is invested in technology stocks. And rather than invest in beaten up value stocks, the portfolio trades at an aggregate P/E in line with the S&P 500. But price is not value. We believe these securities, selected through a fundamental bottom-up process that focuses on quality companies, are valued to deliver solid returns with below market levels of risk.

GMO’s reputation in the investment world is as a value investor that identifies and avoids asset bubbles. Given the current environment, we asked ourselves: what do most of our clients and other investors assume that GMO thinks about markets? That list would likely look something like this:

■ Equities are bad
■ U.S. equities are the worst
■ FAANG stocks are in a bubble
■ “Value” is the virtuous way to invest
■ The best investment approach is quantitative and top-down

If this is your perception of GMO then our Quality Strategy may surprise you. This is a benchmark agnostic equity strategy that invests globally, but holds more than 80% of assets in U.S.-domiciled companies. From a sector perspective, nearly half (45%) of the portfolio is in technology names,1 including positions in three of the five FAANG stocks. While we are very careful to not overpay for a stock, we do not manage according to traditional “value” metrics and our portfolio trades at a premium, albeit a modest one, of a P/E of 18.2 relative to 17.2 times for the S&P 500. This positioning is a result of our security selection process, which is decidedly bottom-up and fundamental.