Contrarian Sticks to His Guns

NEW YORK ( TheStreet ) -- GMO's famously contrarian portfolio managers have been sticking to their guns.

At a time when markets have been soaring, the GMO funds have turned cautious. Instead of owning red-hot small stocks, the managers favor stodgy giants. As a result, most of the GMO funds trail their categories.

During the past five years, GMO US Core Equity III (GMUEX) returned 15% annually, lagging 74% of peers in Morningstar's large blend category. Other funds that trailed more than 70% of peers include GMO Quality VI (GQLOX) andGMO Benchmark-Free Allocation (GBMFX).

Should shareholders jump ship? Not necessarily. In the past, the GMO managers have often proved prescient. During the roaring bull market of the late 1990s, GMO founder Jeremy Grantham told anyone who would listen that stocks were too expensive.

Avoiding highflying technology shares, he trailed until the market sank in 2000. Then the GMO funds surged to the front of the pack, and Grantham was hailed as a hero. He again protected shareholders during the financial crisis.

Even if GMO is wrong about its latest forecast, the funds could still be worth considering because they provide diversification. Ranking among the least volatile choices in their categories, the funds have excelled in downturns. By avoiding big losses, the GMO funds delivered competitive long-term returns. During the past 10 years, GMO Benchmark-Free Allocation returned 9.3% annually, outperforming 85% of peers.

Most of the GMO funds are designed for institutions. Retail investors who want to follow the approach can buy Wells Fargo Advantage Asset Allocation (EAAFX), which is managed by GMO. During the past 15 years, the Wells Fargo fund returned 7.2% annually and outperformend 76% of peers in the world allocation category.

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