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Archive for the ‘GMO’ Category

The biggest investment question of all

What I like about the market analyst James Montier  is the honesty of his approach to following markets. He thinks deeply about the issues and although he is best known as a behavioural finance expert, his analysis is more wide-ranging than just that. In an interview earlier this year he was asked about the single most important challenge facing any investor at the moment – namely, how to build a portfolio in a period when everything seems to be too expensive. This is how he answered: Read the rest of this entry »

Written by Jonathan Davis

July 7, 2014 at 1:02 PM

Why quality stocks pay off

It is no accident that some of the best performing fund managers of the last few years have been those who have stuck to investing in powerful global equities with a consistent history of profitability and sustainable earnings and dividends. In the UK those who fall into this camp include Neil Woodford at Invesco Pereptual, Nick Train of Lindsell Train, Sebastian Lyon at Troy Asset Management (mentioned in my last post) and Terry Smith, whose equity funds solely buy and hold this kind of high return on equity stock. It is also of course at the root of Warren Buffett’s long success as an equity investor.

But why do so-called quality equities (defined as stocks which have low leverage, high returns on equity and consistent earnings) perform so well, yet are so regularly overlooked by the majority of investors in favour of more speculative growth stories? A recent research note from Jeremy Grantham’s team at GMO uses long run US data to highlight the persistently superior performance of quality stocks and their particular attractions in today’s binary (“risk on, risk off”) market conditions. The primary driver behind this superior performance is the ability of these companies to preserve and grow capital, not to lose or squander it as many do, either through incompetence or normal competitive pressures.

Here are a couple of short extracts from the GMO research paper:

True competitive equilibrium is a rarity in the global economy. Instead, we find persistent winners and persistent losers. The competitive paradigm says that highly profitable activities attract capital, and that capital flees those with low profits. This is the market mechanism behind mean reversion, which is supposed to close the profitability gap. In reality, certain companies earn persistently high returns on equity. Superior returns are delivered to investors in the form of dividends, stock buybacks, and accretive growth.

Read the rest of this entry »

Written by Jonathan Davis

August 18, 2012 at 12:17 PM