GMO Is Feeling Pain Reminiscent of the Late 1990s

The patience of GMO’s clients is “wearing thin,” according to Ben Inker, the firm’s head of asset allocation.

Illustration by II

Illustration by II

GMO’s pain is intensifying to levels the value investment firm last endured during the runup to the stock market bubble of 2000.

“It seemed as if every single thing that could go wrong for us from an investment standpoint did,” Ben Inker, GMO’s head of asset allocation, said in the firm’s third-quarter letter to clients. “The recent cycle has gone on for significantly longer and the pain caused to our portfolios has begun to approach 1990s levels.”

The losses GMO suffered during the extreme disparities in stock valuations before the internet bubble burst made it hard to convince clients that its prospective returns “were actually very good,” according to Inker. The firm, founded by Jeremy Grantham, is again seeking to persuade impatient clients that holding tight will similarly pay off.

“As the current cycle has ground on slowly but surely, the valuation extremes have moved wider, creating an opportunity set for valuation-driven investors that looks as extraordinary as what we saw 20 years ago,” Inker told clients in the letter. “For both the global equity portfolio and the multi-asset class portfolio, things appear to be even better than they were in 2000.”

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The “unimaginably bad” performance of GMO’s global equity and multi-asset strategies before 2000 set the stage for better times — as then reflected in the firm’s forecasts, according to Inker. “The next decade saw the strategies win by amounts that well rewarded their patience.”

This time around, the firm’s underperformance versus benchmarks has been 20 percent to 25 percent less than in the late 1990s, he wrote. But the duration has been “particularly painful.”

“This period has lasted over 10 years instead of the 5 years of the late 1990s,” Inker explained. “Unsurprisingly, our clients are once again finding their patience wearing thin.”

He pointed to other differences between the two periods.

In 1999, the U.S. and the Europe, Australasia, and Far East, or EAFE, markets had more “extreme value opportunity,” according to the letter. “But EAFE and emerging are both significantly cheaper relative to the U.S. today than they were back then,” Inker said. “And while value is not quite as well-positioned in the developed world, it is slightly better positioned in emerging than it was then.”

GMO’s forecasts for its global equity and multi-asset portfolios increasingly rose relative to their benchmarks during the late 1990s, driven by the “extraordinary discount of value stocks,” according to the letter. Then, as the internet bubble burst, valuation disparities began to normalize. The firm’s portfolios saw “extraordinary outperformance” during this time, while the superiority of its portfolios, based on its own forecasts, “slowly waned,” Inker wrote in the letter.

“Today is not 2000, and today’s opportunities are not quite the same as the ones we had at our disposal 20 years ago,” he said. “But in our estimation, they are similarly extraordinary and far better than anything we had seen before that event or have seen since.”