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% of rivals this year, according to data compiled by Bloomberg. Mr. Grantham’s $14.9 billion GMO Quality Fund is up 5.7% this year, worse than 99% of rivals, even though its top holding, Oracle Corp., is up 29%.
Small and midsize stocks almost doubled the return in 2010 of the Standard & Poor’s 500 index, the benchmark for U.S. large-capitalization equities. Still, the three managers 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,” Mr. Yacktman, who manages his $1.9 billion fund from Austin, Texas, said in an interview.
Mr. Miller’s flagship large-cap fund, the $4 billion Legg Mason Capital Management Value Trust, gained 6.6% this year, trailing 98% of similarly managed funds, Bloomberg data show. Mr. Miller’s midcap fund, the $2 billion Legg Mason Capital Management Opportunity Trust, rose 17%.
In November, Mr. Grantham’s firm — Grantham, Mayo, Van Otterloo — predicted that the highest-quality stocks, known as blue chips, will return 5.1% a year above inflation over the next seven years, compared with an annual loss of 0.8% 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,” Mr. Grantham, the company’s chief investment strategist, wrote in a newsletter.
Mr. Grantham declined to comment for this story, Tyler Bradford, a spokesman for the company, said in an e-mail.
In 2010, large stocks rose 15%, compared with 27% for midcap stocks and 28% for small stocks, Bloomberg data through Dec. 23 show. Mutual funds that invest in large-cap stocks returned 14%, compared with 23% for midcaps and 26% for small caps.
PIMCO, which manages the world’s biggest bond fund, said the U.S. economy should grow 3% to 3.5% next year, up from an earlier forecast of 2% to 2.5%.
Mr. Miller, of Legg Mason, 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, Mr. Miller trailed the index for the next three years.
Robert Hagstrom, a Legg Mason portfolio manager, reiterated the case for buying large-cap 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, Mr. 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.
Mr. Miller declined to comment, Legg Mason spokesman Mary Athridge said in an e-mail.
Mr. Yacktman, founder and chief investment officer of Yacktman Asset Management, 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% a year for the 10 years ended Nov. 30, Morningstar data show, topping 99% 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 has a dividend yield of 3.5%; Microsoft yields 2.3%.
“We can’t find a stock among the 20 or 30 biggest U.S. companies that looks expensive,” Mr. Stattman said in the interview. His fund rose 9.2% this year, trailing 54% of rivals.
In a Dec. 15 e-mail, Mr. Stattman wrote that while large-cap stocks are not as cheap as they were earlier in the year, “We still think they are attractive.”