In a recent episode of Behind the Ticker, Catherine LeGraw, asset allocation strategist at GMO, shared insights into the firm’s approach to value investing and their newly launched ETFs, including GMOV, their U.S. value ETF. LeGraw, who joined GMO in 2013 after working at BlackRock and Barclays Global Investors, brings a top-down perspective to asset allocation, seeking valuation-driven opportunities across asset classes. She emphasized GMO’s commitment to long-term value investing and its employee-owned structure, which allows the firm to focus solely on clients’ best interests.
About Catherine LeGraw and GMO
LeGraw explained that GMOV stands out among value-focused ETFs due to three key differentiators. First, GMO takes a top-down approach, looking for entire groups of dislocated or misvalued stocks, rather than relying solely on bottom-up stock selection. Currently, the fund focuses on the cheapest 20% of the market, which GMO believes represents a tremendous opportunity for deep value investing. Second, the firm does not rely on standard accounting data but instead restates financials to reflect true underlying value, such as treating research and development expenses as investments rather than operating costs. Lastly, GMO incorporates forward-looking projections tailored to each company’s unique characteristics, providing a more accurate estimate of future profitability.
Investment Strategy and Approach
GMOV also applies rigorous portfolio construction techniques to balance deep value opportunities with quality and growth characteristics, avoiding common value traps. LeGraw highlighted GMO’s use of proprietary red flag screening, which examines accounting metrics, management behavior, and market signals to identify potential risks. The fund consists of approximately 150 names, with sector weightings determined by valuation attractiveness rather than traditional market cap constraints. Unlike many passive value ETFs that may be overweight in sectors like utilities, GMO’s active approach allows them to avoid sectors they consider overvalued.
In addition to discussing the U.S. market, LeGraw also touched on GMOI, their international value ETF, which she believes offers an even greater opportunity given the relative cheapness of international equities and the potential tailwind of currency valuation shifts. She emphasized that value investing is currently priced for significant outperformance, with deep value trading at historically attractive levels.
Portfolio Construction and Implementation
For advisors and investors looking to diversify their portfolios away from an overconcentration in U.S. large-cap growth, LeGraw suggests GMOV and GMOI as substitutes for passive value exposure or as adaptive allocations to capitalize on the current value opportunity.
Deeper Dive: Insights from the Full Conversation
Beyond the headline strategy, the full conversation between Brad and Catherine LeGraw covered several additional themes worth highlighting for advisors and investors.
On Process and Philosophy
So we're not holding anything in the portfolio that we think is expensive just for risk control. So I was going to ask a question on the role of sentiment and some other things and not getting stuck in a value trap. I think you did a great job already answering that. So I'm going to skip ahead and I want to we have been in a long period of relative underperformance of value versus growth. I mean, even in our funds that we run, we run everything equal weight and market cap is just is run right over us.
When you think about the sources of relative return for a value investor, compared to the market or compared to the growth, value stocks always fundamentally undergrowth. By definition, these stocks are trading at a discount for a good reason. They always outmeal the market. They have higher yields than the average stock or then growth stocks. But the big source of relative return, the big source of positive return for a value investor is this re-balancing.
Market Context and Positioning
So I think a lot of model portfolios out there have drifted from model and I've gotten pretty top heavy U.S. growth and specifically market capital weighted growth. So staying on value and you'd mention passive. So in your view, why do passive approaches to value investing kind of fail to capture true economic value? Like, why GMOV over not to put any competitors out there was the first one, like a VTV, right? Just by value passively, what do you think an active approach to this is going to yield better opportunity going forward?
So we have investment teams focus on asset allocation. In addition to dedicated teams focused on equity rates, credit, and hedge funds. So I'd say basically everything in liquid assets. We do for our clients and it's the full structure. We have some active ready to go strategies. The clients will just select and say, hey, that's a good fit for my portfolio. We also partner with our a lot of our clients. The it institutions like foundations, diamonds, pension funds, wealth management firms.
So one example there would be financials. We have a lot of financials exposure in GMOV and we think we can find a lot of banks and financial companies that are genuinely cheap trading and attractive valuations relative to their underlying fundamentals. However, on the other hand, most value approaches value indexes and many other value strategies will be overweight something like utilities. That's something we're currently in GMOV. We have no exposure to utilities. Even though it's typically an overweight and value portfolios, if we're not finding companies that meet our definition of cheap, we're just not going to hold the sector at all.
Notable Insights
"Yeah, I think there are three things that are really differentiated in our approach to capturing value in GMO V."
"Value has been no fundamentally worse over this package decade than it was historically."
Key Takeaways
- She emphasized GMO’s commitment to long-term value investing and its employee-owned structure, which allows the firm to focus solely on clients’ best interests.
- LeGraw explained that GMOV stands out among value-focused ETFs due to three key differentiators.
- Currently, the fund focuses on the cheapest 20% of the market, which GMO believes represents a tremendous opportunity for deep value investing.
- Lastly, GMO incorporates forward-looking projections tailored to each company’s unique characteristics, providing a more accurate estimate of future profitability.
- Unlike many passive value ETFs that may be overweight in sectors like utilities, GMO’s active approach allows them to avoid sectors they consider overvalued.
- market, LeGraw also touched on GMOI, their international value ETF, which she believes offers an even greater opportunity given the relative cheapness of international equities and the potential tailwind of currency valuation shifts.
What This Means for Advisors
For financial advisors evaluating options for client portfolios, this conversation with Catherine LeGraw highlights important considerations around portfolio construction. Understanding the strategy behind each fund—not just the ticker—helps advisors make more informed allocation decisions and better communicate the rationale to clients.
The themes of portfolio construction and fixed income discussed in this episode are particularly relevant in the current market environment, where advisors are increasingly looking for differentiated solutions that go beyond traditional benchmarks.
Listen to the Full Episode
This article is based on an episode of Behind the Ticker, hosted by Brad Roth, Founder and CIO of THOR Financial Technologies. For the full conversation with Catherine LeGraw, including additional nuances and details, listen on Spotify, Apple Podcasts, or watch on YouTube.