GMO: Value Outperformed Growth in the First Quarter. That Doesn’t Mean It’s Over.

“We think there’s plenty of room to run,” said GMO’s co-head of asset allocation John Thorndike.

Daniel Acker/Bloomberg

Daniel Acker/Bloomberg

Value stocks just came off a spectacular first quarter, but investors shouldn’t expect that to make much of a difference in the longer term performance gap between growth and value.

In a brief report from the asset allocation team at GMO, the group argues that while value stocks have been left on the sidelines in lieu of growth stocks for some time now, there was a “meaningful reversal” in the first quarter of 2022. In fact, GMO cited the MSCI ACWI value index’s performance, which outperformed its growth counterpart by 8.8 percent.

But the GMO asset allocation team warns that this outperformance does not mark the finite reversal of value and growth.

“Growth has beat value by so much and for so long that an 8.8 percent move is basically just a blip,” John Thorndike, co-head of asset allocation at GMO, told Institutional Investor.

GMO described growth as “out-compounding” value for over a decade. Consider this: From 2009 to 2021, the MSCI ACWI Value index returned 9.2 percent annually. The authors of GMO’s report called this “commendable.”


But the MSCI ACWI Growth generated a 14.5 percent on an average annual basis. That means growth has out-compounded value by a cumulative — and whopping — 265 percent.

GMO said the reversal in the first quarter is relatively insignificant when it comes to the differential between value and growth.

In the report, GMO’s asset allocation team calculated the ratio of the most expensive third of stocks — growth stocks — divided by the cheapest third of stocks —value stocks — for each sector. They then compared this ratio — or differential between value and growth stocks — to its current ratio and what it has been over time.

“We basically built a DDM [Dividend Discount Model] like a fundamental investor would, except we did it quantitatively and applied it to every stock in our universe,” Thorndike said.

Take the energy sector, for example: The most expensive third of energy stocks in this sector trade at about 3 times the ratio of the cheapest third of energy companies in the energy sector. In other sectors like consumer discretionary and information technology, the difference is even larger.

“The wider that discount is, the more likely it is to shrink back toward an average,” Thorndike said.

Today, Thorndike said the value spreads are still very wide, which means that they will inevitably shrink and return to average. In order for the spreads to shrink, value stocks have to first outperform growth stocks.

While the spreads remain wide, they tightened a bit during the first quarter of 2022. For institutional investors, this means that the best-performing stocks in their portfolios may become some of the worst-performing stocks. But this isn’t going to happen overnight — and the first quarter certainly didn’t change much.

“We think there’s plenty of room to run,” Thorndike said.