Investors Say No To GMOs?
By Roger Nusbaum, AdvisorShares ETF Strategist
The Wall Street Journal recapped the huge outflow in assets under management at Grantham Mayo Van Otterloo & Co (GMO) which probably best known for Co-Founder and CIO Jeremy Grantham and to a lesser extent commentaries by Ben Inker.
Assets have dropped by about one third to $80 billion in the last two and a half years due to dissatisfaction with performance as Grantham has been criticized for missing out on the bull market due to what he believes are unfavorable valuations.
The Journal provided the following recap of GMO’s asset allocation which included 7% in US stocks, 27% in cash, 16.9% in foreign developed, 20% in alternative strategies and 20% in emerging equities and bonds. That only adds up to 90% so perhaps the remaining 10% is in fixed income or timber land which he is a fan of but that might be counted in the alternative sleeve.
There is a lot of insight to be gained from reading Grantham’s quarterly letter which is made available in several places including Barron’s. The fund has had years of strong performance and years where it has lagged or otherwise struggled which is not much different than other strategies. If the actual numbers didn’t meet the expectations of some clients, then those clients will move on and that is what happened.
I think there is a parallel here to John Hussman. He is a prolific writer with great insight on markets but one of his two larger funds has struggled, dropping about 40% in the last ten years. In a similar vein to Grantham, Hussman has cited overvaluation as well as overly optimistic sentiment for his portfolio positioning over the years.
Their observations are probably more correct than not. While valuations are not at all-time highs it is hard to argue they are favorable. Anecdotally, it seems like there have not been a lot of skeptics for the last 1200 SPX points or so.
The way I have worded this before is that I think they draw the wrong conclusion about what markets might do. Markets have a tendency to go up more often than they don’t and while that could change at some point it has proven true up to this point. Unique to the last ten years has been the desperate measures by the Treasury Department (at least at the start of the crisis) and the Federal Reserve to stimulate the economy since the crisis. The results with respect to the economy were not so great but appeared to send equity prices much higher, defying economic theory along the way.
Lagging a bull market is one thing, missing it is another, it does not appear that GMO missed the bull market. This can be read as a behavioral issue. Maybe not for Hussman and Grantham but tracking their positioning without some sort of objective process for decreasing equity exposure is an emotional response along the lines of this guy is pretty smart, I don’t want to lose when whatever happens. Following a luminary investor in that fashion is essentially guessing.
Read Hussman, he is compelling but equity prices have not responded the way they “should have.” A rules based process for increasing or decreasing equity exposure can mitigate the consequences of equities doing the unexpected.