Ben Inker, co-head of asset allocation of GMO, recently added his two cents to the conversation; when asked by Consuelo Mack what one investment he recommended for a long-term portfolio, he said the following:
“Well, we do like the high quality stocks in the US; it’s one group that you can buy and not have to worry too much about what happens to the global economy. I think the expected return through European value stocks are better, or emerging market stocks are better, but there are scenarios where those turn ugly. And the nice thing about the high quality stocks is that they’re priced to do okay, and they should do okay even if we go down one or the other of the difficult paths.”
Looking at GMO’s seven-year asset forecasts from the end of March, we can get a better idea of what's meant by “do okay.” Here are the forecasted annualized real returns through 2020:
|US Large||-1.1% (+/- 6.5)|
|US Small||-2.4% (+/- 7.0)|
|US High Quality||3.7% (+/- 6.0)|
|Int’l Large||2.9% (+/- 6.5)|
|Int’l Small||2.8% (+/- 7.0)|
|Emerging||5.9% (+/- 10.5)|
We got a bit more from Mr. Inker in his fourth quarter letter, “We Have Met They Enemy, And He Is Us:"
“The primary reason that we own quality stocks today is that they look much cheaper than the overall U.S. stock market, but another consideration in their favor is the fact that they are very likely to have more stable cash flows than other companies during a depression or financial crisis. Given that most of the other equities we find attractive today, such as continental European value stocks, would be particularly vulnerable to either depression or crisis, we feel quality is a particularly valuable version of equities to own, and quality makes up a larger percentage of our equity portfolios than its pure forecast would suggest.”
If you’re like me, you’ve had increased difficulty finding places to invest cash in the recent past; to make things even trickier, many names have run up in price over the past few months, and stand much closer to intrinsic value than they did 18 months ago. As a well-respected firm with a solid long-term track record, GMO’s managers are worth listening to. I would think long and hard about what Inker has said in the past few months before making any portfolio changes.
With a solid cash balance on hand (and some portfolio insurance via a stake in Fairfax Financial), I’ve become increasingly focused on position sizing in high quality names like PG, JNJ and PEP, that have slowly crept up towards fair value over the past few quarters. With that said, I see few alternatives – and continue to believe that these names remain among the best choices currently available to long-term focused market participants.
About the author:
I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over a period of many years.