A bit more here from the GMO Q4 report. They provide 5 macro strategies for a volatile environment (via GMO):
Our broad strategies are:
- Maintain Quality bias. Quality gave back a bit of its outperformance this quarter, but the game is in the early innings still. High quality stocks still trade at attractive levels, and the general defensive posture of quality still remains appealing given all of the uncertainties surrounding global prospects, dysfunctional governments, and horrific bond yields.
- Bias toward Value in EAFE. We’ve also begun to bias our international portfolios toward Value. One cannot characterize this as a “big bet,” but valuations are such that we are beginning to see attractive spreads between Growth and Value in international equities.
- Reduce exposure slightly to emerging markets. We funded some of the flows into EAFE both through cash proxies and from Emerging equities. Continued concern surrounding China’s economic bubble and a likely inability to deflate it without contagion effects gave us pause.
- Continued bearishness on bonds. We are literally running out of superlatives to describe how much we hate bonds. Yields are pitiful, dangers of even a slight recovery that could wreak havoc for long-duration portfolios loom, and monetary policies globally certainly have added to the specter of rising yields.
- Invest in conservative absolute return strategies, where available. Ideally, absolute return strategies are often a pure play on manager skill. Therefore, the return streams should have little correlation to the movements of the markets. Such investment instruments can provide equity-like returns, while helping to diversify other parts of one’s portfolio.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.