Bill Miller, Yacktman Say Stick With Biggest Stocks After 2010 Disappoints
Jeremy Grantham, Bill Miller and Donald Yacktman told mutual-fund investors that 2010 was the year to buy the biggest stocks. They’re sticking with the prediction even after getting drubbed by most of their peers.
The Yacktman Focused Fund trailed 75 percent of rivals this year, according to data compiled by Bloomberg. Grantham’s $14.9 billion GMO Quality Fund is up 5.7 percent, worse than 99 percent of rivals, even though its top holding, software firm Oracle Corp. of Redwood City, California, is up 29 percent.
Small and mid-size stocks almost doubled the return in 2010 of the Standard & Poor’s 500 Index, the benchmark for U.S. large-capitalization equities. Still, Yacktman and the others are making the same case for the new year as they did for the last: big companies are undervalued compared with smaller stocks, and their earnings will benefit more from faster economic growth outside the U.S.
“In 40 years I have rarely seen a situation where so many big, profitable international companies are selling at such relatively cheap prices,” Yacktman, who manages his $1.9 billion fund from Austin, Texas, said in an interview.
Two of the top five holdings in the Yacktman Focused Fund - - Microsoft Corp., the Redmond, Washington-based software maker, and pharmaceutical company Pfizer Inc. in New York -- are among its worst performers.
Miller’s flagship large-cap fund, the $4 billion Legg Mason Capital Management Value Trust, gained 6.6 percent this year, trailing 98 percent of similarly managed funds, Bloomberg data show. Miller’s mid-cap fund, the $2 billion Legg Mason Capital Management Opportunity Trust, rose 17 percent.
Focus on Quality
In November, Grantham’s firm, Boston-based Mayo Van Otterloo Co., predicted that the highest-quality stocks, known as blue chips, will return 5.1 percent a year above inflation over the next seven years, compared with an annual loss of 0.8 percent for small stocks.
“I believe (once again speaking for myself) that high- quality stocks should have an even bigger win over low quality than our GMO numbers suggest,” Grantham, the company’s chief investment strategist, wrote in a newsletter.
Grantham declined to comment for this story, Tyler Bradford, a spokesman for the company, said in an e-mail.
Grantham, 72, is best known for his gloomy and often accurate long-term forecasts. In 2000 he predicted that U.S. stocks would lose money in the coming decade.
The S&P 500 gained 0.8 percent annually in the decade through Nov. 30, according to data compiled by Bloomberg. The S&P Midcap 400 Index, a proxy for mid-size stocks, climbed 7.3 percent annually, while the Russell 2000 Index, a benchmark for small companies, increased 6.4 percent a year.
Investors Pull Money
In 2010, large stocks rose 15 percent, compared with 27 percent for mid-cap stocks and 28 percent for small stocks, Bloomberg data through Dec. 23 show. Mutual funds that invest in large stocks returned 14 percent, compared with 23 percent for mid-caps and 26 percent for small-caps.
U.S. investors continue to shun funds that invest in large stocks, according to Chicago-based Morningstar Inc. In the first 11 months they pulled $65.8 billion from large-cap funds, $2.5 billion from mid-cap funds and $90 million from small-cap funds.
Morningstar defines the top 70 percent of stocks by market value as large cap and the bottom 10 percent small-cap.
“Small stocks generally do better when you are coming out of a recession,” said Michael Mullaney, portfolio manager at Fiduciary Trust Co. in Boston, where he helps oversee $9.5 billion. The last recession ended in June 2009, according to the Cambridge, Massachusetts-based National Bureau of Economic Research, which is the official arbiter of economic cycles.
Trend to Continue
Jack Ablin, chief investment officer at Harris Private Bank in Chicago, where he helps oversee $55 billion, said smaller stocks will continue to outperform in early 2011 as they benefit from an expanding recovery. Growth is proving to be better than many economists expected, Ablin said in a telephone interview, and smaller firms are disproportionately reliant on the domestic economy.
Pacific Investment Management Co., the Newport Beach, California-based firm that manages the world’s biggest bond fund, said the U.S. economy should grow 3 percent to 3.5 percent next year, up from an earlier forecast of 2 percent to 2.5 percent.
Miller, of Baltimore-based Legg Mason Inc., said in a July newsletter that investors have a “once-in-a-lifetime opportunity” to buy large-cap U.S. stocks at the cheapest prices in almost six decades. Known for beating the S&P 500 a record 15 straight years through 2005, Miller, 60, trailed the index for the next three years.
Robert Hagstrom, a Legg Mason portfolio manager, reiterated the case for buying large stocks in a report issued this month, saying they are attractively valued and have exposure to fast- growing emerging-market economies.
In a subsequent telephone interview, Hagstrom said U.S. multinationals are as cheap as they have been since 1982. “The market is giving these companies no credit for future growth,” he said.
Miller declined to comment, Legg Mason spokesman Mary Athridge said in an email.
Investors are paying a premium to own small and mid-cap stocks compared with their larger counterparts, said James Floyd, senior analyst at Leuthold Group LLC, a research firm based in Minneapolis. Leuthold defines small stocks as those with market capitalizations from $305 million to $1.5 billion, and large stocks as those greater than $9.7 billion.
The average price-to-earnings ratio for large stocks was 13.2 at the end of November, compared with 14.7 for both small and mid-size stocks, Floyd said.
“Currently we think most of the best values are in the highest-quality companies,” Yacktman, 69, wrote in a letter to shareholders after the second quarter.
Yacktman, founder and chief investment officer of Yacktman Asset Management Co., said he views stocks as if they were bonds and measures a company’s future returns against its current price. The Yacktman Focused Fund returned 13 percent a year in the 10 years ended Nov. 30, Morningstar data show, topping 99 percent of similar funds.
Dennis Stattman, manager of the $48 billion BlackRock Global Allocation Fund, said in an August interview that U.S. giants such as Johnson & Johnson and Microsoft offered global franchises, strong cash flow and healthy dividends. Johnson & Johnson, the New Brunswick, New Jersey-based maker of health- care products, has a dividend yield of 3.5 percent; Microsoft yields 2.3 percent.
“We can’t find a stock among the 20 or 30 biggest U.S. companies that looks expensive,” Stattman, who is based in Princeton, New Jersey, said in the interview.
Stattman’s fund rose 9.2 percent this year, trailing 54 percent of rivals.
In a Dec. 15 e-mail, Stattman wrote that while large-cap stocks are not as cheap as they were earlier in the year, “We still think they are attractive.”
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