On Questioning The Greats
I am a well-documented fan of GMO (legendary investment firm Grantham, Mayo, Van Otterloo & Co) and devour every public contribution from its key figures; particularly Jeremy Grantham, Ben Inker and especially James Montier, who is the author of one of my favorite investing books of all time.
Their investor letters are always excellent and the Q3 released this week was no exception, being a rousing argument for non-US (particularly Emerging Markets) stocks to drastically outperform over the next cycle. Readers will know I am extremely sympathetic to this view, having certainly been influenced by GMO’s thinking myself.
However, I don’t believe in following your heroes unquestioningly, so it was with great surprise that I found the following table at the conclusion of the article:
Clearly designed to show how differentiated the fund’s holdings are from its benchmark (the MSCI ACWI), I couldn’t help but draw the opposite conclusion.
Why hold 32% of your equities in US markets when your own research expects them to deliver negative returns over the next seven years, even if this holding is 28% lower than the benchmark?
Equally inexplicable, why allocate only 24% of your assets to Emerging Value, one of the only sectors globally your own research has noted as capable of acceptable returns?
Potentially the most jarring is the 4% allocation to Japan Small Value, the only equity market GMO has singled out for genuinely outstanding future returns in the current environment (although this strategy is more likely to be liquidity-capped).
There are many reasonable explanations for this through the lens of your typical institutional manager. Size, liquidity and hedging your outlook are all concerns that must be balanced by multi-billion dollar managers. But this isn’t your typical firm.
GMO has built a reputation around being contrarian at the right times. It was Grantham who coined the term “career risk”, referring to the pressure fund managers feel to look similar to the benchmark/herd and fail “conventionally”. He famously opted to lose clients in both the Dotcom bubble and the GFC, rather than change his principled approach which was eventually proven right.
James Montier wrote The Little Book of Behavioural Investing, as well as Value Investing: Tools and Techniques (which I alluded to earlier). Both master-classes with a deeply contrarian bent.
There is no doubting the firms counter-cyclical bona fides and yet, they have they ended up with more equities in a market they are bearish on, than one they consider an outstanding opportunity.
Buffett famously quipped that when it’s raining gold, investors should reach for a bucket, not a thimble. Accordingly, GMO’s allocation smacks of an eye to relative performance, rather than being aggressive in the absolute.
Seeing one of my investing hero’s watered down like this only makes me more hopeful that I can outperform over time and grateful to be independent and unconstrained. I am only answerable to my family and can aggressively allocate where I see the best opportunities, even if the portfolio looks a little strange.
Consequently I am more than 50% invested in EM value stocks today, with the balance predominantly between UK value (also an outstanding set-up, in my view), commodities and cash. In fact, Antero Resources is the only US-incorporated company I own- the US is just not a pond I overly want to fish in at present.
Time will tell if it’s the right move, but I am backing my views with conviction and will sink or swim accordingly.
Signing off for another year
It has been another wild year in the markets and I would just like to extend my thanks to all of you for keeping up with Superfluous Value. I am delighted to have greatly extended my network this year and am a much better investor for your feedback and support.
Happy holidays to you and your loved ones and I look forward to continuing the journey in 2022.
As always, this isn’t investment advice. Please do your own due diligence and seek professional advice if you’re unsure about your finances.