GMO’s Montier on Why to Hold Cash
Asset allocation is the most important decision in constructing portfolios that meet clients’ goals. Two prominent figures in the investment world recently offered sharply different perspectives on the most prudent approach for advisors.
Central bank policies have distorted markets to such a degree that investors are devoid of any buy-and-hold asset classes, according to James Montier. But according to Richard Bernstein, the flood of liquidity unleashed through quantitative easing (QE) now offers investors compelling opportunities.
Montier is a member of the asset allocation team at Boston-based Grantham Mayo van Otterloo. Bernstein is the chief executive officer of New York-based Richard Bernstein Advisors. The two squared off in a panel discussion at the 2013 Morningstar Investment Conference in Chicago last week.
“This is the hardest time to be an asset allocator,” Montier said. “Normally, you find that safe-haven assets are expensive and riskier assets are cheap – and vice versa. But today, largely because of the central banks around the world, we’ve got a very distorted opportunity set, such that there is nothing you can buy and hold.”
Bernstein agreed that QE has upset traditional valuation dynamics, but he said investors still have choices.
“There are pockets that are very, very attractive,” he said. “People are generally unaware of those pockets.”
Let’s look at the key assumptions around Federal Reserve policies that led these two investors to such divergent views of the markets.
Fed policy and its impact on the markets
Low inflation and low interest rates have driven most asset classes to unacceptably high valuations, Montier said.
Montier explained that GMO uses a valuation methodology based on reversion to the mean. It looks at metrics such as margins, earnings and sales growth, then analyzes what the impact will be on prices if those values revert to their long-term averages over a seven-year time horizon.