A recent article in FT Alphaville offers insights from GMO’s Head of Asset Allocation Ben Inker regarding the potential for a value reversal, as outlined in the firm’s third quarter letter to investors.
The article summarizes his comments: “In short, the current market reminds him of 2000—when the Nasdaq bubble peaked, and EM debt was ebbing near its lowest points—and that’s reason for some cautious optimism.”
Here are some highlights:
- Noting that performance of some of the firm’s strategies is reaching the “pain” levels of the 1990s, Inker writes, “This period has lasted over 10 years instead of the 5 years of the late 1990s. Unsurprisingly, our clients are once again finding their patience wearing thin.”
- That said, Inker argues, things now appear to be looking up for the value strategy in part because “other asset allocation opportunities beyond the value style are even better” than they were in 2000.
- Inker notes that investing based on valuation equates to a bet on mean reversion—that securities will eventually revert to their long-term fundamental value. But there are those that think the strategy is doomed–he cites a recent podcast in which Josh Brown of Ritholtz Wealth Management contends that the digital economy has “broken” value investing. The argument is not a new one, Inker says: “The idea of buying stocks with a low price-to-book has long felt redundant due to the rising importance of intangible assets—such as brand equity, and network effects—which tend not to be held on the balance sheet.”
- The absence of inflation may be another culprit for poor value performance, Inker notes, adding that value investing is effectively a bet on sectors, “namely energy and banking, which tend to trade at below the value of their net assets:”
The points raised in Inker’s letter, the article concludes, “brings us back to GMO’s hope of a return to form for their undervalued portfolios. Will they be able to bounce back if, as it looks like at the moment, inflation stays unerringly low across the developed world? Minus a sea change in fiscal policy, it’s hard to see how the price rises of the past will materialize, and value performs.”