On the latest ETF 360, VettaFi’s Cinthia Murphy interviewed GMO Asset Allocation’s Asset Allocation Strategist Catherine LeGraw. The two discussed quality, the speculative market, and value dislocation.
LeGraw on the Current Market Environment
Asked about the current state of the market, LeGraw quipped, “In that classic battle between greed and fear, greed is definitely winning.” She noted that the S&P is up nearly 40% since its extremely rough April, but cautioned that people should look at the speculative side of the market. Artificial Intelligence stocks, unprofitable tech firms, and Bitcoin-adjacent firms are up anywhere from 75% to 200%, according to LegGraw. “These are companies that are priced for incredibly optimistic outcomes that just may not materialize,” she added. A fear of missing out could drive this sentiment. DeGraw noted that “investors appear willing to pay any price for hot stocks.”
How GMO Is Navigating the Speculative Wave
Murphy asked how GMO navigates the “speculative wave” of the current market. In response, LeGraw cut to the chase. She said “At GMO, we don’t get caught up in the latest mania, we stick to our investment discipline.” This involves looking at fundamentals and then being judicious with what the firm is willing to pay. As the markets start to roil and emotion takes over for some investors, LeGraw sees a way out. “An equity investors best defense is an unrelenting focus on quality.” In her view, stable companies with low debt and less volatility are both safer in the short term and can outperform in the long term. “A quality bias has an insulating force in your equity portfolio.”
The GMO U.S. Quality ETF (QLTY) helps investors get actively managed exposure to U.S. quality firms. Accordingly, the GMO International Quality ETF (QLTI) gives investors exposure to international quality firms.
The Quality of Value Is Not Strained
Murphy asked about interesting opportunities in the market given the broader context. LeGraw responded, “I think one of the most interesting opportunities in this environment, and the one I’m most excited about, is value.” In comparison to growth stocks, value stocks are trading at a wide discount, according to LeGraw. “At GMO we don’t think that just buying the cheap half of the market buys you a persistent return premium, but today we’re betting big on value because value is priced to win.” She shared that across their dynamic asset allocation positions today, their biggest active position is value.
Many value indexes, however, rely on backwards looking data, LeGraw shared. They often avoid quality and growth characteristics and sometimes inefficiently deploy value. “My concern about value indexes is that they are not set up to fully capitalize on the value dislocation because they are not designed to pick out those truly mispriced names.”
LeGraw on GMO’s Value Play
GMO has two value focused products, the GMO US Value ETF (GMOV) and the GMO International Value ETF (GMOI). Murphy asked LeGraw where these strategies can fit in an investor’s portfolio. Accordingly, LeGraw said, “GMOI and GMOV are a nice substitute for existing passive or active value exposure. Because we are going deeper into value, we expect to outperform traditional value approaches when value wins.” She added that investors can also use the strategies without value exposure as an opportunistic play.
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