Morningstar Advisor - October/November 2010 - 38

Morningstar Conversation

Might Makes Right
By Ryan Leggio

The market has rarely discounted large, strong companies this cheaply, argue Steven Romick of FPA and Ben Inker of GMO.

Jeremy Grantham has been pounding the table for high-quality stocks since at least 2006. That was the year when his firm, Grantham, Mayo, Van Otterloo & Co., estimated that large-cap companies such as Coca-Cola KO and Johnson & Johnson JNJ would beat the S&P 500 by more than 3% per year during the next seven years. No one paid much attention, as high-quality stocks (defined by GMO as companies that have low debt and stable, above-average returns on capital) lagged over the next two

years. But investors took notice when 2008’s results were tallied: The S&P 500 dropped 37% while GMO Quality GQETX, a fully invested mutual fund stocked with high-quality firms, lost 24% and the Morningstar Wide Moat Index, a market-cap-weighted index of high-quality companies, lost 30%. Grantham and GMO still think the future is bright for these strong businesses. According to GMO’s research, mega-cap high-quality stocks trade at their biggest discount to the S&P 500 in recent

history—a 10% discount today compared with a 40% premium in the mid-1970s (otherwise known as the Nifty-Fifty era). Unlike GMO, other go-anywhere managers had not made much of a fuss about high-quality names. That changed when Steven Romick, manager of the Los Angeles-based FPA Crescent Fund FPACX, announced during his second-quarter conference call that he and his team had been spending "an inordinate amount of time studying high-quality companies." This was big news because Romick,

38 Morningstar Advisor October/November 2010



Morningstar Advisor - October/November 2010

Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2010

Morningstar Advisor - October/November 2010
Contents
New on MorningstarAdvisor.com
Contributors
Letter From the Editor
What estate-planning strategies are you and your clients doing before the end of the year?
Next Steps for ETFs
Investment Briefs
Taking It Personal
A Model Practice
Find the Right Fit
Will REITs Put You in the Penthouse?
Prepare for the Worst
Tips for Common Family Situations
Might Makes Right
Built to Last
Four Picks for the Present
Tactical Strategies Miss Their Mark
Time to Hop on the Commodities Bandwagon?
Retailers Balance Caution and Catalysts
In Search of … Recession Survivors
Turmoil-Tested Small-Cap Funds
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
VA Sales Rise in Second Quarter
The Third Rail
Morningstar Advisor - October/November 2010 - Intro
Morningstar Advisor - October/November 2010 - Morningstar Advisor - October/November 2010
Morningstar Advisor - October/November 2010 - Cover2
Morningstar Advisor - October/November 2010 - 1
Morningstar Advisor - October/November 2010 - 2
Morningstar Advisor - October/November 2010 - Contents
Morningstar Advisor - October/November 2010 - 4
Morningstar Advisor - October/November 2010 - 5
Morningstar Advisor - October/November 2010 - New on MorningstarAdvisor.com
Morningstar Advisor - October/November 2010 - 7
Morningstar Advisor - October/November 2010 - Contributors
Morningstar Advisor - October/November 2010 - Letter From the Editor
Morningstar Advisor - October/November 2010 - What estate-planning strategies are you and your clients doing before the end of the year?
Morningstar Advisor - October/November 2010 - 11
Morningstar Advisor - October/November 2010 - Next Steps for ETFs
Morningstar Advisor - October/November 2010 - 13
Morningstar Advisor - October/November 2010 - Investment Briefs
Morningstar Advisor - October/November 2010 - 15
Morningstar Advisor - October/November 2010 - 16
Morningstar Advisor - October/November 2010 - 17
Morningstar Advisor - October/November 2010 - Taking It Personal
Morningstar Advisor - October/November 2010 - 19
Morningstar Advisor - October/November 2010 - A Model Practice
Morningstar Advisor - October/November 2010 - 21
Morningstar Advisor - October/November 2010 - Find the Right Fit
Morningstar Advisor - October/November 2010 - 23
Morningstar Advisor - October/November 2010 - 24
Morningstar Advisor - October/November 2010 - 25
Morningstar Advisor - October/November 2010 - Will REITs Put You in the Penthouse?
Morningstar Advisor - October/November 2010 - 27
Morningstar Advisor - October/November 2010 - 28
Morningstar Advisor - October/November 2010 - 29
Morningstar Advisor - October/November 2010 - 30
Morningstar Advisor - October/November 2010 - 31
Morningstar Advisor - October/November 2010 - Prepare for the Worst
Morningstar Advisor - October/November 2010 - 33
Morningstar Advisor - October/November 2010 - 34
Morningstar Advisor - October/November 2010 - 35
Morningstar Advisor - October/November 2010 - Tips for Common Family Situations
Morningstar Advisor - October/November 2010 - 37
Morningstar Advisor - October/November 2010 - Might Makes Right
Morningstar Advisor - October/November 2010 - 39
Morningstar Advisor - October/November 2010 - 40
Morningstar Advisor - October/November 2010 - 41
Morningstar Advisor - October/November 2010 - 42
Morningstar Advisor - October/November 2010 - 43
Morningstar Advisor - October/November 2010 - 44
Morningstar Advisor - October/November 2010 - 45
Morningstar Advisor - October/November 2010 - Built to Last
Morningstar Advisor - October/November 2010 - 47
Morningstar Advisor - October/November 2010 - 48
Morningstar Advisor - October/November 2010 - 49
Morningstar Advisor - October/November 2010 - Four Picks for the Present
Morningstar Advisor - October/November 2010 - 51
Morningstar Advisor - October/November 2010 - Tactical Strategies Miss Their Mark
Morningstar Advisor - October/November 2010 - 53
Morningstar Advisor - October/November 2010 - 54
Morningstar Advisor - October/November 2010 - 55
Morningstar Advisor - October/November 2010 - 56
Morningstar Advisor - October/November 2010 - 57
Morningstar Advisor - October/November 2010 - Time to Hop on the Commodities Bandwagon?
Morningstar Advisor - October/November 2010 - 59
Morningstar Advisor - October/November 2010 - 60
Morningstar Advisor - October/November 2010 - Retailers Balance Caution and Catalysts
Morningstar Advisor - October/November 2010 - 62
Morningstar Advisor - October/November 2010 - 63
Morningstar Advisor - October/November 2010 - 64
Morningstar Advisor - October/November 2010 - 65
Morningstar Advisor - October/November 2010 - In Search of … Recession Survivors
Morningstar Advisor - October/November 2010 - 67
Morningstar Advisor - October/November 2010 - Turmoil-Tested Small-Cap Funds
Morningstar Advisor - October/November 2010 - 69
Morningstar Advisor - October/November 2010 - Mutual Fund Analyst Picks
Morningstar Advisor - October/November 2010 - 71
Morningstar Advisor - October/November 2010 - 72
Morningstar Advisor - October/November 2010 - 73
Morningstar Advisor - October/November 2010 - 50 Most Popular ETFs
Morningstar Advisor - October/November 2010 - 75
Morningstar Advisor - October/November 2010 - Undervalued Stocks With Wide Moats
Morningstar Advisor - October/November 2010 - 77
Morningstar Advisor - October/November 2010 - VA Sales Rise in Second Quarter
Morningstar Advisor - October/November 2010 - 79
Morningstar Advisor - October/November 2010 - The Third Rail
Morningstar Advisor - October/November 2010 - Cover3
Morningstar Advisor - October/November 2010 - Cover4
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2021q3
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2021q2
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2021q1
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q4
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q3
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q2
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q1
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019winter
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019fall
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019summer
https://www.nxtbook.com/nxtbooks/morningstar/magazine_2019spring
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20191201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20181011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20180203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20181201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20171011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20170203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20171201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20161011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20160203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20161201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20151011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20150203
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20151201
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20141011
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140809
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140607
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140405
https://www.nxtbook.com/nxtbooks/morningstar/magazine_20140203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20141201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20131011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20130203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20131201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20121011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120405
https://www.nxtbook.com/nxtbooks/morningstar/investorconference2012
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20120203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20121201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20111011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20110203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20111201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20101011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100809_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100607_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100405_lincoln
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20100203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20101201
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20091011
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090809
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090607
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090405
https://www.nxtbook.com/nxtbooks/morningstar/advisor_20090203
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008fall
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008summer
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007spring
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007fall
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2007summer
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008spring
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008catalog
https://www.nxtbook.com/nxtbooks/morningstar/advisor_2008winter
https://www.nxtbookmedia.com