Interesting interview with James Montier in this week’s issue of Barron’s. Montier is a member of the GMO’s Asset Allocation team. Prior to GMO, he was co-head of Global Strategy at Société Générale. Some excerpts / highlights below:

• On being a value investor in the current environment: “The U.S. has been an incredibly strong market for a number of years, so going passive is classic returns-chasing behavior. How do you manage the pain? Nothing in the precepts of being a value investor tells you about the path or the timing. It just tells you about the final destination. The light at the end of tunnel is that the more that people buy on the basis of market cap, the greater the opportunity for active managers.”
• On the possibility that this time is different: [Jeremy Grantham, the founder of GMO] says bubbles are best characterised by excellent fundamentals irrationally extrapolated. In the classic manias, everybody believes this time it’s different. Jeremy says we don’t have that, that the world is worried, not euphoric, and therefore this isn’t a bubble. My perspective is that we have a bubble of complacency, and people are acting as if there are no risks, while I see a world full of them, from slowdowns in China to a euro-zone crisis to Fed tightening. And yet pretty much all assets look to be priced for perfection.”
• On building a portfolio under these conditions: “You stop trying to build so-called optimal portfolios, which are a very strong statement about your belief in the state of your knowledge – that your expected returns are going to be this, which to me is absurd. You build a robust portfolio that can survive lots of different outcomes – a world where Jeremy is right and it takes 20 years for mean reversion to happen, or one where I’m right and the markets revert considerably faster.”
• On what that translates into: “A sensible portfolio today has a sizeable amount of dry powder. You have to say: “Look, I know cash is giving me a lousy return, but it has an option value that comes in when there are dislocations in markets.” Now, the risk of that strategy is clearly that this time is different and there is no more volatility. Then take your equity risk mainly where you are getting paid the most for it – emerging market value stocks. There are also different ways of owning low standard risk. Merger arbitrage is a way of owning equity that has a very different duration profile.”