GMO is well known for its seven-year asset class performance forecast. Even before the financial crisis, the firm emphasized quality stocks. Since the recovery, it's put even more weight on quality U.S. stocks while being very cautious on other asset classes, even on emerging market stocks that it used to be more optimistic about. Given what is unfolding right now in the market, GMO's emphasis on high quality U.S. stocks would serve its funds well.
We looked at the top 10 holdings on GMO Quality IV (GQEFX). This fund seeks to investment in equities the manager believes to be of high quality. It should also be noted that the fund is permitted to invest in equities in any country in the world, including emerging countries. The fund is not diversified.
The following are the top 10 stocks, as of May 31.
|Johnson & Johnson Common Stock||JNJ||5.90|
|Philip Morris International Inc||PM||5.55|
|Pfizer, Inc. Common Stock||PFE||4.45|
|Cisco Systems, Inc.||CSCO||4.41|
|Coca-Cola Company (The) Common||KO||4.00|
|Exxon Mobil Corporation Common||XOM||3.19|
We can see these stocks are from consumer staples, technology and healthcare. Consumer staples and healthcare stocks are traditionally considered to be defensive. Technology stocks are different this time; they have better balance sheets and steady revenues, thanks to their globalization at two ends: Cost-wise, they outsourced to emerging market, lowering manufacturing and R&D costs; revenue-wise, their international market presence help them increase sales dramatically, even though domestic sales are very anemic.
Here are the cash holdings for the four technology stocks.
It was also widely reported that Apple had more cash than the U.S. treasury after S&P downgraded the U.S. debt rating. Though this was of more entertaining value, it did point out how much cash these companies right now are holding.
The following table shows some of characteristic of these holdings:
|Averages||GQEFX||Large Cap Avg|
|Dividend Yield %||2.84||1.95|
|Book Value Growth||5||-0.56|
|3 Year Earnings Growth||12.73%||8.16%|
Even though they are not cheap -- they have slightly higher P/E, P/B and P/S -- their earnings growth and book value growth are way above the norm. Furthermore, their 2.8% yield is much better than the large cap average of 1.95%.
Let's see how the top holdings have done by comparing this fund with two diversified dividend ETF portfolios.
Portfolio Performance Comparison
|Portfolio/Fund Name||1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Retirement Income ETFs Strategic Asset Allocation Risk Profile 0||3%||28%||2%||8%||3%||8%|
|Retirement Income ETFs Tactical Asset Allocation Risk Profile 0||7%||45%||14%||70%||13%||62%|
[Click to enlarge]
The takeaway is that equity investors can look at the top 10 stocks as their long term holding candidates. The large U.S. multinationals that have strong brands and pristine balance sheets will do well in this coming balance sheet recession or slowdown.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.