Here's what Jeremy Grantham's buying and selling as stock markets continue to rise and the firm's stock holdings underperform.
Jeremy Grantham: Market Oracle
Jeremy Grantham is the co-founder and chief investment strategist of Grantham, Mayo, & van Otterloo, more commonly known as GMO. He is best known for his quarterly newsletters and for popularizing the ‘reversion to the mean’ concept in investing. He has also predicted key turning points in market indices and was listed by Bloomberg Magazine as one of the 50 most influential people in global finance.
Grantham, who is British, began his career as an economist at Royal Dutch Shell. He later worked at Batterymarch Financial Management where he started one of the world’s first passive investment funds in the early 1970s.
In 1977 he founded GMO, which is based in Boston, with Richard Mayo and Eyk Van Otterloo. The firm’s funds invest in global equities and bonds, including emerging market assets. GMO does not disclose its assets under management, but the firm was reported to have managed over $124 billion in 2014.
Grantham has gained a wide following as a result of his insightful quarterly newsletters he sends to clients. The newsletters, which invariably find their way into the public domain, are full of investment wisdom, timely calls and have even been written in the voice of Shakespearean characters.
Grantham is an environmental advocate and started the Grantham Foundation for the Protection of the Environment in 1997. He has been a very vocal opponent of the Keystone Pipeline, and believes the world should not be investing in more fossil fuel infrastructure.
Reversion to the Mean
Mean reversion, as employed by GMO, is similar to value investing. The difference is that where conventional value investors use company specific fundamental data to assess valuations, GMO uses history as a guide.
Grantham and the GMO team spend a lot of time analysing stock market valuations and bubbles throughout history. They use long term valuation trends to calculate what they believe to be the fair value for an asset. They then invest in assets that have moved a long way below fair value.
Grantham believes strongly that history repeats itself and that every bubble eventually bursts. He used his knowledge of bubbles to predict the dotcom bubble in 2000 and the housing bubble in 2007. He also managed to get his clients out of Japanese equities when they peaked in the late 1980s.
He avoids leverage because as he says, “Leverage reduces the investor’s critical asset: patience.” If investors use leverage, they cannot afford to ride out periods of weakness. He also uses diversification to reduce risk. He knows that bets can go against one, and diversification spreads the risk. GMO diversifies across global equity and bond markets.
Grantham often points out that retail investors have a critical advantage over professional investors, namely that they can be patient. Professional investors are often compelled to act to justify the fees they charge, and to mitigate career risk. While Grantham himself is a professional investor he often uses his newsletter to try to persuade his clients to be patient. This doesn’t always work, and he often loses clients who are not prepared to be as patient as he is.
The nature of Grantham’s approach is that GMO tends to underperform during bull markets and then outperform when markets correct. Unsurprisingly, over the past few years the firm’s funds have underperformed many of their peers. As a result the firm’s clients have reportedly withdrawn $40 billion since 2014.
Grantham also believes that to really capitalize on their patience, investors occasionally need to be brave. In March 2009, the same month the current bull market began, he sent out a newsletter entitled “Reinvesting When Terrified.” The newsletter explained why the market was offering one of the best buying opportunities in history and it was time for investors to step up - a call that may have been his best to date.
However, Grantham may find himself terrified again as this bull market shows no signs of slowing.
GMO's Latest Form 13F Filing
On November 14th, 2017, Jeremy Grantham's firm GMO filed their quarterly Form 13F regulatory filing. I reviewed the 13F filing to review holdings in GMO's large portfolio.
GMO's stock portfolio totals nearly $16.1 billion according to the latest filing. The list value of stock holdings is down -11.6% when compared to the last quarter. As a benchmark, the S&P 500 was up 3.9% over the same period.
Quarter-over-Quarter Turnover (QoQ Turnover) measures the level of trading activity in a portfolio. GMO's QoQ Turnover for the latest quarter was 21.0%, so the firm appears to trade a significant percent of its portfolio each quarter.
GMO's Largest Holdings
The Ideas section of finbox.io tracks top investors and trending investment themes. You can get the latest data on the holdings discussed below at the Jeremy Grantham page. The following table summarizes his firm's largest holdings reported in the last filing:
|Ticker||Name||Holding ($mil)||% Of Portfolio|
|JNJ||JOHNSON & JOHNSON||$593.5||3.7%|
|EEM||iShares MSCI Emerging Markets||$491.8||3.1%|
The seven positions above represent 26.2% of the hedge fund's total portfolio.
GMO's 7 Largest Purchases
I also used finbox.io to find GMO's largest buys last quarter. Here's the list of the biggest stock purchases determined by comparing the last two filings:
|Ticker||Name||Purchased ($mil)||% Of Portfolio|
|ACN||ACCENTURE PLC IR...||$322.7||2.0%|
|WFC||WELLS FARGO CO NEW||$245.5||1.5%|
|EEM||iShares MSCI Emerging Markets||$242.1||3.1%|
|EWZ||iShares MSCI Brazil||$134.2||0.8%|
|COL||ROCKWELL COLLINS INC||$78.5||0.5%|
|LQD||iShares IBoxx Invest Grade Bd||$57.7||1.0%|
GMO's 6 Biggest Sells
Here's the list of biggest position reductions determined by comparing the last two filings:
|Ticker||Name||Sold ($mil)||% Of Portfolio|
|EWY||iShares MSCI South Korea||$170.7||0.9%|
|PM||PHILIP MORRIS IN...||$138.0||1.5%|
GMO's Most Undervalued Holdings
To determine which stocks are trading below their intrinsic value, aka "fair value" I used the finbox.io Fair Value estimates. I also wanted to blend in some indication of which stocks might be ready to make a move up soon because they're popular with Wall Street analysts.
I calculated an average using the finbox.io fair value upside and analyst upside to create a blended upside which I then used to rank the most undervalued holdings.
Here are the top 7 stocks based on my calculations:
|Ticker||Name||Upside (finbox.io)||Upside (Analyst Target)||Blend Upside|
|BPI||BRIDGEPOINT ED INC||73.3%||82.5%||77.9%|
|JE||JUST ENERGY GROU...||60.9%||83.6%||72.2%|
|RRD||DONNELLEY R R & ...||-1.8%||103.6%||50.9%|
|SOHU||SOHU COM INC||55.3%||30.5%||42.9%|
Managers with more than $100 million in qualifying assets under management are required to disclose their holdings to the SEC each quarter via 13F filings. Qualifying assets include long positions in U.S. equities and ADRs, call/put options, and convertible debt securities. Shorts, cash positions, foreign investments and other assets are not included. It is important to note that these filings are due 45 days after the quarter end date. Therefore, GMO's holdings above represent positions held as of September 30th and not necessarily reflective of the fund's current stock holdings.
However, most can agree that with thousands of stocks traded on U.S. exchanges, doing thorough research on each one is nearly impossible for smaller investors. Leveraging the resources of the largest hedge funds on Wall Street can be a powerful way to narrow down the list.
As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.
Author: Matt Hogan
Expertise: Valuation, financial statement analysis
Matt Hogan is a co-founder of finbox.io. His expertise is in investment decision making. Prior to finbox.io, Matt worked for an investment banking group providing fairness opinions in connection to stock acquisitions. He spent much of his time building valuation models to help clients determine an asset’s fair value. He believes that these same valuation models should be used by all investors before buying or selling a stock.
His work is frequently published at InvestorPlace, Benzinga, ValueWalk, AAII, Barron's, Seeking Alpha and investing.com.
Matt can be reached at [email protected].