The Engine Behind Equity Dislocation

Presenter

Simon Harris

 

Carl O'Rourke

 

 

Overview

When seeking the cheapest stocks, simple value ratios should come with a “health warning” due to their tendency to favor lower quality stocks with the poorest growth prospects. In the GMO Equity Dislocation Strategy, we take a different approach to invest in stocks that are cheap, even after we account for their growth and value characteristics, using our Price to Fair Value model. By building growth expectations directly into our model we are giving higher growth, less capital-intensive businesses a better chance to look attractively valued. Our Price to Fair Value approach leads Equity Dislocation to a set of holdings that is differentiated from the passive alternative, notably that the Strategy can hold attractively valued, high quality growth companies on the long side of the portfolio.

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Key Points

  • The Price to Fair Value model builds on decades of valuation research at GMO.
  • GMO historically used a version of the Price to Fair Value model, but it was relaunched for Equity Dislocation after the completion of extensive Economic Fundamentals research which restates company financials to better reflect economic reality.
  • Forecasting future returns on equity is the anchor around which everything else is built. We incorporate growth and quality by modeling future profitability and reinvestment decisions.
  • The Price to Fair Value model is the engine behind Equity Dislocation and is also utilized as part of a broader suite of valuation models in our long-only global equity portfolios.

WE INCORPORATE GROWTH and QUALITY BY MODELING FUTURE PROFITABILITY AND REINVESTMENT DECISIONS


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Disclaimer: The views expressed are through the period ending November 2021, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.
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