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Jeremy Grantham, co-founder and chief investment strategist of GMO

Portfolio > Asset Managers

GMO’s $8B Fund Is Beating S&P 500

By Isabelle Lee & Denitsa Tsekova

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Jeremy Grantham is a famous bubble hunter, quick to point out speculative excess on Wall Street and beyond.

So it would seem like a surprise that the biggest mutual fund at his firm — GMO  — is betting on many of the so-called Magnificent Seven tech stocks that have surged so much this year that they may look, well, a little bubbly.

But to Tom Hancock, manager of the $8 billion GMO Quality Mutual Fund, there’s no contradiction per se: Hancock’s just following the firm’s recipe for investing in companies with solid track records.

That’s driven the fund to an approximately 25% gain this year, outpacing the roughly 18% advance by the S&P 500 — even after it shied away from two of the benchmark’s biggest gainers, Nvidia Corp. and Tesla Inc.

The strategy is mirrored in the firm’s first ETF, the $17 million GMO U.S. Quality ETF that was launched last month.

“It’s funny — companies like Microsoft and Apple, you would think those would be super crowded companies but I actually don’t know that they are,” said Hancock, who has been the lead portfolio manager of the mutual fund since 2015 and with GMO since 1995. “We hold them. Obviously, we think the valuations are reasonable.”

The perspective may allay some worries that big tech stocks have run too far, with the recent leg up fueled by speculation the Federal Reserve will pull the economy to a soft landing and shift to cutting interest rates early next year.

The Nasdaq 100 Index, one proxy, is up 44% this year, mirroring the gain in 2020 when the Fed’s near-zero rates set off a trading frenzy.

Fund Focus

The GMO fund has a majority of its holdings — around 90% — in consumer staples, tech and health-care. It’s underweight on industrial and financial stocks, and, at least in the last four years, has avoided telecom, utilities and energy companies.

It has beat over 90% of its peers one a one-, three- and five-year basis, according to data compiled by Bloomberg.

Despite this year’s rally, the GMO fund’s managers think Apple, Amazon.com Inc., Google-owner Alphabet Inc., Facebook-owner Meta Platforms Inc. and Microsoft Corp. — five of the Magnificent Seven — still have room to rise.

It has avoided the other two in the cohort: Nvidia, which Hancock sees as too pricey, and Tesla, which he says doesn’t have a strong enough edge on its competition.

Hancock bought Amazon in 2022, when its stock price was cut in half and his fund was hunting for other well-established businesses whose shares were battered in the selloff. His approach includes paying higher valuations if the profit trajectory looks good enough.

For most of last year, Hancock’s fund was tilted in favor of cheap-looking quality stocks. As growth equities — favored for their faster-than-average earnings expansion — sold off, the investor increased exposure to some of the mega-cap names.

“When GMO talks about value, we pretty much always mean some more holistic notion of intrinsic value that recognizes that quality characteristics deserve a premium,” Hancock said. “We think it’s good value to pay a higher multiple for companies that can grow at a high return on capital.”

He said the fund has always invested at least 75% of its assets in U.S. stocks, with the remaining holdings mostly in European multinationals. Some of his fund’s top-performing are UnitedHealth Group Inc., Oracle Corp. and Eli Lilly & Co.

“We focus on valuation of the stock as well as quality of the business,” he said. “We’re not looking for cigar butts, but rather trying to avoid what’s over hyped.”

(Image: Bloomberg)

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