At GMO’s 40th annual conference, GMO investors presented our latest thinking on mainstream investment issues, such as inflation, China, the Value opportunity, and ESG, as well as more specialized topics, such as high-quality EM local debt, Japan equity attractiveness, and real asset investing in the resources and climate change sectors.
We believe that providing advice to our clients is one of our most important responsibilities, and in a market environment where we are seeing stretched valuations in many areas, our job is that much more important. We are excited to share the content from our Conference, where we discussed how we are working to capture returns and develop effective investment solutions for our clients.
Included below are overviews of all the GMO Conference sessions with links to more detailed summaries, which were presented in the U.S. on November 3rd and in Europe on November 15th.
A staggering 77% of Americans fear soaring inflation. James Montier has a more sanguine view of inflationary risks. In this session at the GMO Fall Conference, James explored some of the tall tales and true causes of inflation. He also explained what investors can do from a portfolio perspective if he is wrong.
Investors are seeking real asset strategies to diversify portfolios, provide an inflation hedge and deliver strong returns amidst an investing environment characterized by expensive markets coupled with the threat of ongoing inflation. In this session Lucas White, portfolio manager of GMO Resources and Climate Change Strategies, discusses how these strategies can help investors meet these objectives.
Government intervention has always been a key risk to investing in emerging markets. Chinese regulatory actions today are no different. In this presentation, we focus on China’s “Principal Contradictions” to understand major policy shifts and how they affect investment within China. We discuss how investors should think about their China exposure, and how an EM ex-China strategy enables investors to precisely target their China allocation.
In this session, Ben Inker speaks about value opportunities today compared to the market environment a year ago during our last Investor Conference. Ben defines “growth traps” and why they are at least as destructive as value traps, if not more. John Thorndike follows with a deeper dive into regional equity performance and valuations and their implications for opportunities and portfolio construction going forward.
How does one invest “safely” in emerging market local debt? In this session, we discuss the benefits and application of a quality-focused emerging market debt strategy that offers positive real yield differentials relative to developed markets, as well as drawdown protection and diversification relative to broad equity risk measures.
GMO panelists discussed our ESG integration journey from Asset Allocation, Fixed Income, and Equity perspectives. In our early days, GMO started by working with clients to reflect their social and environmental values in separately managed accounts. Over time our approach to ESG integration has evolved, and in recent years our investment teams have launched both top-down and bottom-up approaches to ESG integration. More recently, firm-wide efforts have also included building a proprietary GMO ESG Score and enhancing GMO’s approach to engagement.
GMO’s Quality team generally seeks to win by investing in great companies under temporary clouds and in companies where the quality is improving in a way the market has not fully appreciated. Today, various reopening stocks with a Covid-19 overhang are examples of the former, and the transformed semiconductor industry provides examples of the latter. In addition, Quality investing with a valuation component wins over the long run by protecting on the downside, and we believe the strategy is well positioned for some of the potential headwinds for equities that exist today.
Jeremy Grantham discussed his thoughts on climate change, resource limitations, and bubbles – three topics that are having profound effects on the world today. Climate change is accelerating – last year was the greatest year of methane emissions output in history – and yet we are still long on promises and commitments and unbelievably short on action. There is good news, that green technology is accelerating, but we are still in the race of our lives. Meanwhile, we continue to ignore the impossibility of compound growth on a finite planet. Commodities, especially those metals critical to transitioning to green technology, are scarce. In the next twenty years, resource limitations combined with greening the economy will cause an unexpected energy and resource squeeze. Finally, in developed markets, every time we have seen a 2-sigma bubble, it has eventually gone all the way back to trend, with few exceptions. Today, we’re at 3-sigma and it looks like we might melt up to 4-sigma. The higher it goes, the bigger the decline. The dangers of asset bubbles have always been underrated.
Access to Jeremy's presentation is exclusively for GMO clients.
GMO’s Asset Allocation team is forecasting low absolute stock and bond returns today. However, capital markets are providing the best relative return opportunities in over 20 years, which provides tremendous potential to outperform the traditional 60/40 portfolio. In particular, the dislocation between growth and value equities, pushing growth stocks into bubble territory, allows for numerous ways to position portfolios to benefit in this environment.
Given poor prospects for future returns from historically expensive equity and fixed income markets, investors should consider alternative investment strategies. One idea is to combine our distressed debt and merger arbitrage capabilities, which complement each other through the economic cycle producing equity-like returns while providing a smoother ride (less volatility) than equities. Our distressed debt and merger arbitrage strategies are concentrated, fundamental strategies that have been at GMO for over 10 years. The combination of the two strategies into a single portfolio is a great building block for generating returns in all environments.
Despite lackluster returns over the last few years, Japanese equities have garnered more attention recently. Investors are attracted to rising profitability, attractive valuations, and a more shareholder-friendly environment. Global institutional investors, however, remain underweight Japan on concerns that recent profit improvements are simply a cyclical “head fake.” Indeed, Japan’s response to Covid-19, handling of the Olympics, and lag in reopening have reinforced the view that Japan is a low-return-on-capital market. But we believe this market, now showing signs of shareholder-friendly change following a decade of surprisingly strong fundamentals, is worth a closer look.
GMO has developed a platform – dubbed “NEBO” – that melds financial planning and asset management. NEBO is built on our Needs-Based Allocation framework, which redefines risk not as volatility but as “not having what you need, when you need it.” Over the past year, we have had the good fortune to work with a handful of innovative financial advisors as design partners, achieving significant usage milestones along the way. At the 2021 GMO Fall Conference, Martin Tarlie demonstrated how NEBO helps advisory firms generate better portfolios for their clients.
The GMO asset class forecasts are grounded in valuation, and therefore equilibrium expectations are critical. We have long recognized the possibility of a permanent shift in interest rates. Consequently, for the past seven years, we have created two sets of forecasts: one assuming assets revert to an equilibrium aligned with historic norms, and the other assuming that equilibrium interest rates and the cost of equity capital have shifted permanently lower. In this session, we revisit the plausible regimes for equilibrium interest rates, we introduce a new scenario that we are considering, and we examine the implications for our forecasts and ultimately for our investment decisions.
The COVID-19 pandemic and its aftereffects have made a significant impact on the commercial and residential real estate world. In this roundtable, we share our outlook for U.S. real estate in a world with and without COVID-19, the rapidly changing and accelerating trends in the asset class, the potential impacts of inflation, and how GMO seeks unique structural attributes when evaluating the risk/reward tradeoff in the real estate debt market.
Emerging sovereign debt investing spans a broad opportunity set that includes very high credit quality countries, single/double B type countries, distressed countries, and defaulted countries. The 2020 pandemic brought a bumper crop of sovereign defaults and pushed some credits into stress/distress. We discuss how GMO positions its portfolios in the stressed, distressed, and defaulted countries, showcasing alpha techniques as well as future total return potential coming from the defaulted countries getting back on their feet.
GMO’s Systematic Global Macro team, like many other investors, is on a journey to better understand the implications of ESG incorporation on investment portfolios. The GMO Systematic Global Macro team has a long history of deep research, and we apply that thoughtful approach to the question of ESG in systematic macro by analyzing three ways in which ESG data could be used in a systematic process.
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.