GMOs: there is joy in missing out
When a friend gave Ben Inker a bespoke sweatshirt with “JOMO” – the joy of missing out – on the front, the co-head of asset allocation at asset manager GMO knew that it had the title of the company’s fourth quarter letter.
Indeed, the letter was about the silver lining of the bear market in 2022: investors finally had the opportunity to buy assets and strategies that are either cheap or at least fairly priced. And that means that if the markets continue to fall, the dangers are more of being too late to get back into the markets than of being too soon.
In an interview, Inker said that what was common among the few things that did well last year – a list that includes resources, resource companies, commodities, global macro and long-value strategies and short-growth – was that “many investors had abandoned them. Global macro was a popular strategy after the global financial crisis because it protected portfolios during the market downturn, but then it disappointed investors when other investments have done well. So has value over the past 10 years. As Inker said, “The only things that haven’t lost money [last year] were things you had to be pretty aggressively upsetting [about] able to contemplate.
On the other hand, speculative growth stocks and assets such as crypto – which had extreme valuations and had done very well in 2020 and 2021 – had, according to Inker, “needed a sort of aggressive new era. thinking that the normal rules don’t apply and that your standard analysis had to be thrown out the window. They deserved what they got [last year]. Assets made no sense.
Contrary to the case GMO’s Jeremy Grantham made earlier this month – that the declines in 2022 were just the start and more pain was coming – Inker said: “Even if you can’t ring the bell, everything is more attractively priced today than a year ago. People have to recognize that the problem with 60-40 a year ago wasn’t that it was broken, it was that the 60 and 40 were very expensive.
A year ago, Inker’s favorite portfolios were filled with liquid alternatives or non-traditional assets as it was the worst environment ever for stocks and bonds. OGM is still bullish on these. “A year ago where we had the flexibility – and to be clear, we didn’t always have that flexibility – to move into liquid alts, we wanted to do it with as much rope as anyone would give us,” said he declared.
A year ago, GMO had 61% of its non-benchmark allocation strategy in liquid alts, with the largest position in an equity dislocation strategy, which is long on global value and short on stocks. global growth stocks. The allocation strategy also included 10% in an overall macro portfolio, 7.5% in a relative value and carry product, and 18% in other slightly less aggressive long-short equity products.
Today, equity dislocation remains GMO’s preferred liquid alternative, despite posting double-digit returns last year. The manager also expects Systematic Global Macro Strategy, his second position last year, to be able to exploit mispricings this year.
But the asset allocation strategy will have larger positions in traditional stocks and bonds, which again look much more attractive from a valuation perspective. A year ago, equities accounted for 28%, credit 11% and alternatives 61% of the portfolio. Today, stocks are at 44%, credit is at 18% and alternatives have fallen to 38%.
GMO increased its equity allocation in part by buying value. The company believes that value remains at attractive prices globally. But deep value is the best opportunity.
“In the United States, a strong year for value has not done as much for the cheapest value stocks as might have been expected,” Inker wrote in the letter. “When bad things happen to relatively cheap assets, it usually creates a good buying opportunity, and we think emerging equities and debt and high-value US equities are worth investing in today.” today.”
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