By The Sizemore Letter
He is too much of a gentleman to do it, but if there was ever a money manager who could say “I told you so” it would be Jeremy Grantham of GMO. Grantham and his team warned of the dangers of the 1990s tech bubble years before it burst, and warned of the consequences of the 2000s housing bubble long before anyone else took it seriously.
But lest you think Grantham is a congenital permabear, he was also buying with both fists as the market was finding its panic bottom in 2008 and early 2009.
He doesn’t always get it right, and, frankly, some of his investment commentary—such as his warnings of a catastrophic global food shortage—inches into kooky territory. But as far as large, high-profile money managers go, his track record over the past decade is hard to beat.
So what are Grantham & Co doing these days?
To start, they are dumping bonds.
In a recent interview with the Financial Times, Ben Inker, Grantham’s co-head of asset allocation, said that GMO has “given up” on the bond market, or at least on long-maturity government bonds. Rather than hold Treasuries—which yield practically nothing at all maturities on the yield curve—GMO is preferring to simply sit mostly in cash for the non-equity portion of its portfolio.
Where else is GMO investing? For the past several years, Grantham & Co have favored high-quality American and European multinationals, and this is the same approach Sizemore Capital has taken. These blue chips would seem to offer the best risk / reward tradeoff at today’s prices, particular if they pay a decent dividend. Emerging markets have been a favorite fishing pond as well, though Inker considers them “scary” due to the risk of a Chinese hard landing.
Interestingly, Inker is modestly bullish on Japan. I consider Japan to be the potential short opportunity of a lifetime, so one of us is going to be wrong. It’s generally bad policy to bet against GMO, but I am betting that this is one time with Grantham’s team is dead wrong.
Where does all of this leave investors?
If you own bonds in a mutual fund or ETF, I’d recommend you follow GMO’s lead and dump them. Now. At current yields, the pitiful return is not worth the risk of capital loss. There is no upside from here. At all. As in “nada.”
If you own individual bonds that you have held for a long time, the story is a little more complicated. Unlike a mutual fund, which has no maturity and is presumed to last forever, individual bonds do mature. Assuming you didn’t buy your bonds at a premium, this means that you are guaranteed to at least get your original investment back.
If you are collecting a decent coupon from a bond you’ve held for a while, then there is little harm in holding it to maturity. But if you’re the trading sort, then I’d follow Grantham and Inker and dump them. There is better money to be made elsewhere.
This article first appeared on MarketWatch.
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