Kim Mayer, GMO

Kim Mayer is a portfolio strategist on the Focus Equity team at GMO, the firm Jeremy Grantham founded 45 years ago. Kim spent the first half of his career on the sell side at Morgan Stanley, starting in investment banking before moving to capital markets. He joined GMO in 2006, initially on the client side, before transitioning to the investment team about 15 years ago. His current role is split between portfolio strategy and communications, plus covering stocks in what he jokingly calls the "frivolity" sector: beer and spirits, luxury goods, TJX, and catering companies.

On this episode, Kim talks with Brad about QLTY, GMO's first ETF, which brings their 20-year quality investing track record into a US-only, actively managed ETF wrapper. He explains why combining quality and valuation produces a better outcome than quality alone, and how GMO constructs a roughly 40-name portfolio from a universe of the highest-quality companies in America.

Twenty Years of Quality at GMO

GMO has been running a quality strategy for 20 years, but for the first decade-plus, access required a $10 million minimum buy-in. The firm gradually opened the strategy through mutual funds and SMAs, and in 2023 took the next step by launching QLTY, a US-only ETF where a single share costs around $29. Kim describes the evolution as "broadening availability" to meet a steady drumbeat of demand from the wealth channel for a US-only version of their global quality flagship.

The founding insight goes back to Jeremy Grantham himself, who as a value investor struggled with the fact that the highest-quality companies always traded at premiums that made them uninvestable through a pure value lens. The solution was quality-adjusted value: acknowledging that great businesses deserve higher multiples, but still screening for situations where those premiums are reasonable rather than extreme. That dual lens of quality plus valuation has been GMO's differentiator for two decades.

Building the QLTY Portfolio

The construction process blends quantitative and fundamental analysis. Step one: a proprietary quant model screens for quality based on factors like profitability, stability of returns, balance sheet strength, and capital allocation. This produces a quality universe of roughly 100 names. But Kim emphasizes that even the best quant models generate false positives and false negatives, so the team does extensive fundamental work on top of the quantitative screen to vet each company.

Step two: valuation work narrows the vetted quality universe down to 60-70 names. Step three: risk adjustments around liquidity and diversification bring the portfolio to its final form of roughly 40 holdings. Position sizing follows a simple formula: quality times value equals position size. A top-tier quality company at an attractive valuation can be a 6% position at time of purchase. A mid-tier quality name at less compelling value might start at 1-2%. The maximum position size is capped by the quality score, with valuation acting as the dial within that range.

Kim notes that GMO is explicitly benchmark-agnostic in how they weight sectors. They're happy to develop large concentrations in sectors with many quality opportunities and to have zero weight in sectors where they don't find quality at reasonable prices. Currently, QLTY doesn't own three or four S&P 500 sectors entirely. The result is a portfolio that looks nothing like the benchmark but historically has provided strong performance in both growth-driven and value-driven market environments.

Quality Plus Valuation: Why Both Matter

Kim's core message is that quality alone isn't enough. Plenty of products buy high-quality companies at any price, and while that works over very long periods, you can dramatically improve the return and risk profile by adding a valuation filter. GMO's research shows that buying quality at attractive valuations significantly increases downside protection and improves returns across market cycles compared to quality-only or value-only approaches.

He points to 2022 (a value-driven year) and 2023 (a growth-driven year) as evidence. GMO's quality strategy outperformed the S&P 500 in both environments, which is unusual for any actively managed strategy. Kim attributes this to the quality-plus-valuation combination: in down markets, high-quality companies with reasonable valuations hold up better, and in up markets, quality companies with attractive entry points participate fully in the rally without the valuation overhang.

Key Takeaways

• GMO has managed quality strategies for 20 years. QLTY brought that track record into a US-only ETF where a single share costs roughly $29, down from the original $10 million minimum.
• The portfolio holds about 40 names, with position sizing driven by a "quality times value" formula. Top-tier quality at attractive valuation can start at a 6% position.
• GMO intentionally leaves out entire S&P 500 sectors where they don't find quality at reasonable prices, resulting in a portfolio that looks nothing like the benchmark.
• The flagship quality strategy outperformed the S&P 500 in both 2022 (value-driven) and 2023 (growth-driven), demonstrating the all-weather benefit of combining quality with valuation discipline.
• Kim covers beer and spirits, luxury goods, TJX, and catering stocks, what he calls the "frivolity" sector, while also handling portfolio strategy and external communications.

Listen to the full conversation on Spotify, Apple Podcasts, or YouTube.