We should party tonight

Added: Jeannette Bodin - Date: 20.11.2021 18:02 - Views: 42228 - Clicks: 1832

Prior to ing GMO inhe was an institutional portfolio manager on the asset allocation team at Pyramis Global Advisors, a subsidiary of Fidelity Investments. ly, he was the director of institutional investment strategy and research at Putnam Investments. He is a CFA charterholder. Broker check. History does not repeat, but it rhymes, as Mark Twain observed. Back then, Value investing and Value managers were under the gun for having underperformed their Growth brethren for too long. Valuation spre between the U. While it is, of course, notwe see ominously similar market phenomenon today.

True, stock market valuations in the U. Further, many of the largest tech companies today, the so-called FAANGS, are likely not part of the bubble problem: these companies are real and large global businesses, highly profitable, and millions, even billions, of people use their products and services every day. Com, WebVan, and other infamous Super Bowl ad buyers from the dot.

Too, interest rates are ificantly lower today and, while a debatable point, many argue that lower rates ipso facto should lead to higher equity valuations. But history never exactly repeats, it merely rhymes, as Mark Twain thoughtfully pointed out.

And today, there are some eerily similar and dangerous rhymes echoing in our ears. Back then, we were forecasting a decade-long negative return for U. And that is exactly what happened. Today, the warning is actually more dire. But it gets worse. What they all had in common was that each began with stocks or bonds being expensive. Today, stocks and bonds are pricey.

This frightens us and it should frighten you. Unfortunately, they were saying the same thing back inright before it failed them for a decade. Framed more positively, we think this is the perfect time to look unconventional, just like Then, he calculated the expected return of the traditional benchmark. Exhibit 2 plots the month-by-month delta, or difference, between these two expected returns.

It is a measure of how good the opportunity set has looked and changed through time. Inthe delta between the two portfolios was over bps annualized. Ben wrote to clients at the time that it was highly unlikely we would ever see such an amazing opportunity again. In the late s, Value managers were on the defensive. The Value style had been out of favor for more than half a decade. Well-known Value firms were losing clients and going out of business. Fast forward to today and the same rhymes are echoing.

Well-known and established Value shops are calling it quits. Exhibit 3 focuses on the last 5 years, drawing eerie parallels between today and Not painful enough? Enter the Covid Growth rally ofwhich started on March 23 and continued all summer. We believe this is a time for leaning into Value, not away from it. When mean reversion ultimately occurs, just as it did in the post period, investors will want to be on the right side of that trade. Back inGMO was not all gloom and doom. True, we were pointing out the dangers of a Growth stock bubble in the U. Just like today, however, clients were nervous about EM equities.

EM equities had underperformed the U. How cheap? Basically, we were saying that EM equities were about to outperform the U. This time, the Value half of EM equities has been the perennial disappointment. EM equities have been weighed down by a host of fears and worries: trade wars, slowing economic growth in China, etc. The nature of the concerns are not exact repeats ofbut can you hear the rhyming? This underperformance of EM Value stocks — despite that fundamentals have performed quite well, actually — leave the asset class looking quite cheap.

But the story gets even better. First, this basket of companies has lower debt-to-equity ratios than do typical EM companies. They have not gone on debt binges as their U. Finally, their currencies are cheap, another possible tailwind to performance see Exhibit 6. We believe EM Value is poised to outperform the U. From a strict valuation perspective, the run-up of U. But we were hesitant to call it an official bubble because not all of the ingredients were there.

First, the economy itself was in pretty good shape as was the U. The optimistic mood of the markets was understandable.

We should party tonight

Both of those things changed dramatically in First, the economy was destroyed by Covid; unemployment went from historic lows to historic highs in a matter of weeks. The real worrisome s, however, are the increasing silly behaviors of a speculative market. Exhibit 7 is a prime example of the aggressive trading activity of retail investors. Though relatively calm for over a decade, this past spring awakened their animal spirits: daily trading activity increased nearly seven-fold over three short months.

The final parallel between today and is painful to write about. Asset Allocation positioning is looking stupid today.

We should party tonight

Our Value bias, our underweight to U. In fact, this late 90s episode was featured at the Harvard Business School, which teaches its classes using the case method. Clients were tired of hearing about mean reversion, tired of hearing about prices and valuations mattering.

We should party tonight

And they lost patience. Though many held on, just as many fired us. At exactly the wrong time. Value investing is full of paradoxes. First, the relationship between a Value manager and its client is sadly and tragically paradoxical: clients tend to fire us at the very moment they need us the most, and they need to hire us exactly when they are least likely to do so.

We should party tonight

In rapidly rising markets, Value styles lose in a relative sense; and then in down markets, yes, we lose less, but we still lose! Value investing is an amazing investment model, but a horrible business model. Finally, there is the paradox of confidence. How do we make sense of this paradox? We look to a similar period when we trusted in mean reversion when everyone else was doubting it.

A period when sticking to a process seemed prudent and disciplined, while others called it stubborn, antiquated, and inflexible. And a period when the worst business decision for GMO ended up being far and away the best and right thing to do for our clients. In other words, a period like Download article here.

We should party tonight

GMO is not responsible for the content on this website. Asset Allocation Team. Peter Chiappinelli Articles. Executive Summary History does not repeat, but it rhymes, as Mark Twain observed. Morgan J. Treasury minus the month trailing CPI. Bonds U.

We should party tonight

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