Kim Mayer, GMO

Yeah. So I've been rattling around the finance industry for a long time. I spent the first half of my professional life on the sell side at Morgan Stanley doing a bunch of stuff. I started out in investment banking, ended up in capital markets and then made the shift over to the buy side about, well, back in 2006. So about 18 years ago now. So I've been at GMO for quite a while. My first responsibilities at GMO were on the client side. And then about 15 years ago or so, I jumped over to one of our equity teams. And I work on the focus equity team now at GMO. That's the team that manages the QLTY ETF. It's the team that manages our quality strategies. And it's a pretty small team. We all tend

So that's what they figured out I'm good at. Well, that's great. So yeah, I can relate to wearing multiple hats with trying to sell and do some portfolio strategy work as well. But so I always like to ask everybody this question before we get too deep into the mechanics of the portfolio is what do you like to do outside of work? Any hobbies when you're not sitting behind the desk?

Yeah, I would say so. GMO is based up in Boston. So we're in New England. I moved up here from New York about 20 years ago. So we're lucky to be in a good spot to be on the water. So I love to spend time on the water with my family, frozen water in the winter. So skiing and then sailing, doing whatever we can in the summer. My kids are getting a little bit more far flung, but we're able to lure

Them back for fun activities. So that's probably my favorite activity. Yeah. It's funny. We've done probably 35, 40 of these episodes now and you're the first person or I'm sorry, the fourth or fifth person that's really into boating. there must be something with ETFs and boating. We'll have to dig into that. Yeah. So, can you just talk about GMO as a whole? You guys do a lot of things. So, what all does GMO do kind of at a high level to help clients and how are you

Serving clients? Yeah. And so GMO, we're not the biggest shop in the world. I think what we're well known for is a very thoughtful approach to investing in public security. So we have a pretty good equities business. We have a pretty good fixed income business and we have a pretty good asset allocation business as well. That's one thing, a lot of folks in the wealth channel do know us for. Jeremy Grantham founded the business about 45 years ago. A lot of people do know Jeremy. They know him as a value manager and certainly value valuation is an important part of our heritage. So I would say we're long-term investors. We're valuation oriented and we're really focused on our clients. In the early days, our clients were all institutional, but we've sort of gotten a little

Eight years. Yeah. So you guys recently, fairly recently, 2023 got into the ETF business, right? With the launch of quality, which we're going to talk about in depth. What kind of made GMO make that jump from, its core business to sticking its head into the Thunderdome of ETFs?

Yeah, it can feel like a Thunderdome sometimes. I think, we certainly are not pioneers in the ETF landscape. It's, we've been looking at it from afar for quite some time. We wanted to choose the right time to get involved. We don't try to, we certainly don't, aren't the type of investment shop that tries to flood the market. We want to come in with the right opportunity, the right strategy at the right time. And I think it's kind of a natural evolution from, if I think back to when I started at GMO in 2006, if you wanted to access the quality strategy, which we ran, we've been running a quality strategy for 20 years now at GMO, but the minimum buy-in when I started was $10 million. And then the next step was we, you know,

So is quality a, um, was it a mutual fund conversion or are these all new assets?

So it's not exactly a mutual fund conversion. So as I mentioned, we've been managing a quality strategy at GMO for 20 years. to the extent people know anything about GMO, they tend to think of GMO as, as kind of a value shop, but I could argue that, that, that quality is every bit a part of our DNA as well. And when Jeremy Grantham was in the process of putting GMO together with his partners, he was sort of struggling with that idea that he could never own these quality businesses as a classic value managers, because they always traded a significant premium to the market. Um, but he came up with some good identifiers and initially GMO used that in our equity practices by practicing a form of quality adjusted value.

With this, with this launch. Yeah. And this is a great time to be talking about quality, right? we've had such a push over the last handful of years into growth. We all know what happened last year growth just absolutely dominated, uh, well really any, any or every asset class. So I think it's a great time to be talking about quality. So again, the ticker is QLTY. It's the GMO U S quality ETF. And we talked about it a little bit, but can you just really give a high level of what the fund is really trying to accomplish? Yeah. So first and foremost, we're not going to own a company

In this strategy if we don't believe it to be very, very high quality. Um, I think we have a good handle on what that means. Um, and one of the interesting things about the way we manage this portfolio, construct this portfolios, you wouldn't describe this as purely a quantitative or purely a fundamental strategy. We try to bring the best of both of those sort of techniques as, as we, um, as we manage this portfolio. So the first job is we just need to build the best quality universe that we can. We're going to start with a quant model as a screener, but then do a lot of fundamental work on top of that to, to sort of solve the problems that even the best quant models are going to have

The ETF and you, you go through your quant screen, you go through your fundamental screen, does the portfolio get, um, fairly concentrated or is there a number of holdings that you're targeting? what can investors kind of expect as a holding profile? Yeah. And so I would tell you that

The way most of our investors utilize this strategy within their overall, um, equity portfolio is as a core equity holding. Um, and, um, what this portfolio gives you, we do, we absolutely manage this portfolio in a benchmark agnostic fashion. In other words, we're happy to, to develop sector concentrations in those sectors where we find a lot of well valued, high quality companies. We're equally happy to have little or no weight in those sectors where we don't. Um, and so I think that sort of means that it's an inherently less risky portfolio because you're going to be less exposed to those riskier parts of a benchmark. Um, I think we've attracted a lot of attention over the last few years and we've had a lot of early uptake with, with QLTY as well. I think, active management has become a

In both S&P in both of those environments. Yeah. So again, like when you finish going through your screen and you're actually physically constructing the portfolio, right. What does, uh, I understand, we understand kind of what goes in it, but is there, do you concentrate the work? Like, are you looking at 30 names, 50 names, a hundred names? What does the profile holding profile look like?

Yeah. And so, once we've gone through that sort of step one of the process, we've got a, what we think of as kind of a vetted quality universe of round numbers, about a hundred names. Um, we do that valuation work. We're going to narrow that down a little bit further to, 60 to 70 names or so. We're going to do some, some risk adjusting on top of that around liquidity, um, diversification, sort of policy risks that we're underwriting throughout the portfolio. At the end of the day, it's a pretty concentrated portfolio around numbers, about 40 names. So it's not, a 10 or 15 name, purely fundamental portfolio, nor is it a, a hundred plus name, purely quantitative

Yeah. I love that. And then as, as far as, um, weighting is concerned, when I, when I went in and looked at everything's, it's not equal, you're not equal weighting these 40 names. So is there a conviction? Are you, how are you going about the weighting decisions? And then on top of that, once you've come to those weighting decisions, I know the portfolio is active, but is there kind of a schedule in which you're revisiting those weighting decisions?

So two great questions. I'll try to, I'll try to tackle them in order. So we, we follow a pretty simple, um, position sizing heuristic, um, and that's quality times value equals position size. And so we, we're not, we, we try to keep this simple. Um, we try not to make our process overly complex. And so your maximum position size is determined by how high quality you are. Um, and then we just use valuation as a dial to figure out where within that range of maximum position size that you, that you end up. So if you're a top tier quality company and you're very attractively valued, you can be a time of purchase, a 6% position. If you're mid tier quality, your maximum position size is 3% and you can sort of follow that logic through. So as you observed, you know,

It's decently concentrated high conviction portfolio. And then how often are you kind of revisiting that in terms of a daily look, weekly, monthly, you know? So we don't follow a rigorous, you know,

Sort of systematic trading pattern with this portfolio. We, we tend to trade this portfolio when, and if necessary, it is a low turnover portfolio on average. I think we're lucky that we, we have that advantage of operating within a quality opportunity set. And that's a pretty sticky group, right? It's hard to become a quality company. It's almost equally hard to unbecome a quality company. Usually the way you do that is you make some bad capital allocation decisions, and that's going to sort of kick us. That's the most likely way to get kicked out of our quality universe. Um, but it's a pretty sticky group. Um, so that name turnover is apt to be pretty light. So most of the turnover that we do deliver in any given year is just rebalancing around that

Yeah. So when just one kind of side question on that, when you're looking at quality, people tend to think only, the massive mega cap names are going in. Is it, is that generally the case in this portfolio? Are you kind of finding some opportunities in some other subsectors of the market?

So, quality companies tend to be around for a long time. They're successful. They tend to grow. We don't think of size being a term in terms of determining whether or not you are high quality, but this company is, the vast majority of the companies in this portfolio are, fall squarely within the mega cap category. Now that's not to say that you can't find some high quality targets down in, mid cap, even in small cap. We actually, GMO, my group actually launched about 18 months ago or so, a small cap quality strategy. It is not at this point in time available in the ETF format. We still have just the one. I think, we do hope to build out that suite of active ETFs a little bit further when, when the time

Yeah. So I talked to a lot of model portfolio firm that help advisors construct model portfolios. When you see that quality sleeve or that value sleeve, you tend to see kind of like a VTV or a qual in there, QAL, right? Yep. So those are obviously their passive opportunities. I'm a big believer in active. So what benefits do you think quality, QLTY, kind of provides over your more traditional iShares qual?

Yeah. So, and I think that's a great comparison to make. And those are, I think those are good ways of getting passive exposure. But I think, to your point, you can make a pretty solid case for paying an active manager fee. And so we kind of start in the same place. Qual, QLTY, they start in the same place. We're running a quant screen. The factors that we're looking for look pretty similar to each other. But then that qual portfolio, what does it do next? It does some market cap, adjusting. There's your portfolio. What do we do on top of that? We spend a lot of time obsessing about whether or not our quant model is kicking out a few false positives or a few false

Return standpoint versus those portfolios. So you'd mentioned a couple of times, this is kind of a core equity position, but ideally if you're sitting down with, an institution or an advisor, somebody who has a model portfolio, diversified model portfolio geared for their clients, how would you ideally put quality inside of that portfolio and how would

You help supplement maybe large cap equity with it? Yeah. And so, I think, so a lot of people choose to use passive for, for accessing large cap equities, right? It's been hard to beat the S&P 500 over the course of the last, I don't know, a couple of decades. We've managed to, but it's tough. And so, so, but I think people are beginning to realize, again, we touched on this subject a couple of moments ago, kind of the riskiness of those broad market, of broad markets today around concentration, valuation, et cetera. And so a substitution for that passive way of getting broad market exposure. And so we've been able to pretty successfully make the case that this is a lower risk way of getting, large cap exposure, core exposure, what have you.

Well, Kim, I really appreciate you taking some time with me today. I, congratulations on the success of this product early. Like I said, it launched in 2023. You guys have started off with a bang, but before I let you go, where can people learn more about GMO? Where can people learn

More about the quality ETF? Yeah. So if you go to, I think the easiest way to access information is just to go to GMO.com. And the landing page has a big banner talking about QLTY. We're excited about it here at GMO as well. But Brad, it's been a pleasure talking to you. Thanks for, thanks for

Spending the time with me today. Yeah, Kim, again, thanks for joining us. And we'll, hopefully, see you soon at one of the, before we were on, we were talking about conferences. So maybe I'll run in the next one. Yeah, I hope so.