The GMO Quality Investment Fund USD Account won in the equity category with a fund size equal or greater than US$1 billion ($1.36 billion) at the Best Fund Awards 2024 by The Edge Singapore. The fund has three aspects: growth, core and value.
The investment management firm says the Quality Growth part of the portfolio was driven by innovations like AI and GLP-1 (drugs such as Zepbound, Ozempic’s competitor), contributing significantly to the fund’s total return. In late 2022, the fund was rebalanced with Microsoft, Amazon and Meta when these stocks became more attractively valued following a severe correction due to rising inflation and interest rates.
“Despite the macro headwinds, our view on the quality of these businesses remained unchanged, and our analysis suggested that the market underestimated their future growth prospects, especially considering their investments in AI capabilities. This shift in market perception regarding the profit trajectory of the Quality Growth companies led to a strong rally in share prices, resulting in the outperformance last year,” GMO says.
The top contributors to the fund’s outperformance last year were companies like Meta, Salesforce, Amazon, Adobe and Lam Research, which returned more than 70%. The Quality Investment Fund increased its position in Meta when the stock was trading at a single-digit multiple in late 2022, due to challenges in the digital advertising market and heavy investments in AI, and this appears to have been beneficial.
“Conversely, with Adobe, we believed that the market had overestimated the benefits of AI to the company, prompting us to liquidate the position in late 2023. This decision might have seemed contrarian given the broader market trends and the tech sector’s overall performance, but it was based on our assessment of the company’s fundamentals and future prospects. This move highlights our investment strategy of focusing on quality and valuation, rather than following market sentiment,” GMO says.
GMO’s buy thesis for Eli Lilly, dating back to 2019, was based on the strength of its pipeline in GLP-1s. At that time, the stock was trading at a very normal multiple for a pharmaceutical company. This bet paid off as the market became excited about the use of GLP-1 in weight loss and in slowing Alzheimer’s disease last year.
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The Core Quality component focuses on defensive holdings in software businesses like Oracle, mature and stable healthcare companies such as Johnson & Johnson and consumer staples firms like Nestle. These companies tend to be less influenced by fluctuating market sentiment and offer lower absolute volatility, GMO says.
The Quality Value portfolio segment is where GMO’s more contrarian ideas tend to land. It includes holdings like UnitedHealth, a US health insurer whose valuation, depressed by political uncertainties, trades below levels suggested by its profitability and reinvestment opportunities. “We continue to maintain holdings in pandemic-affected companies, particularly those in travel-related sectors. For instance, we initiated a position in Safran, the leading maker of engines for narrow-bodied jets, in 2021. We believe that the stock was undervalued, not fully accounting for the many years of servicing ahead for their dominant installed base,” GMO says.
