The Value and Quality Opportunity

Overview

GMO co-Head of Asset Allocation Ben Inker and Head of Focused Equity Tom Hancock recently joined Meb Faber to offer their take on markets so far in 2023 and why they find quality and deep value so compelling. They also touch on AI, growth traps, and dealing with the complexities of career risk.

You can listen to the full podcast here: The Meb Faber Show Episode #486: Ben Inker & Tom Hancock, GMO – The Value and Quality Opportunity

Highlights from the discussion include:

• The quality spectrum and the backwardization of risk. The expectation is that achieving higher returns requires taking more risk. But higher-quality stocks have outperformed lower quality stocks by a considerable margin despite being less risky (15:51). We believe this is due to career risk – or that a lot of money is managed by professional money managers with different motivations (17:05).
• U.S. deep value stocks are unusually cheap. In the U.S. market in particular, the cheapest 20% looks cheaper than it has been 98% of time through history (27:55).
• Growth traps, like value traps, cause underperformance. Value stocks are not the only ones that disappoint, and growth stocks that disappoint can be death in your portfolio. Growth traps, which are at least as prevalent as value traps, have underperformed their universe by nearly 23% per year versus 15% for value traps (32:08).
• Exciting Opportunities. AI is a uniquely nice area to invest in because you don’t have to buy the headline stocks or household names – companies in the supply chain are equally important and will reap the same benefits (41:43).
• Dealing with the complexities of career risk. Managers are almost always fired after a period of underperformance, and yet tend to outperform after they have been fired. Having a battle plan in place and playing out some scenarios in advance can help to prevent emotional decision making (54:01).

Download pdf here.

Ben Inker Co-Head of Asset Allocation, Portfolio Manager Mr. Inker is Co-Head of GMO’s Asset Allocation team and a portfolio manager for the team’s products. Mr. Inker is a member of the GMO Board of Directors and a partner of the firm. He joined GMO in 1992 following the completion of his bachelor's degree in Economics from Yale University. In his years at GMO, Mr. Inker has served as an analyst for the Quantitative Equity and Asset Allocation teams, as a portfolio manager of several equity and asset allocation portfolios, as Co-Head of International Quantitative Equities, and as CIO of Quantitative Developed Equities. He is a CFA charterholder.

"If there was a single bias I was going to have to my equity portfolios under every circumstance – if I was just going to do one thing for the next 100 years – I’d have a quality bias because it’s less risky. And unless the world changes, it’s not going to underperform."

Tom Hancock Head of Focused Equity, Portfolio Manager Dr. Hancock is the Head of GMO’s Focused Equity team and a portfolio manager for GMO’s Quality Strategies. Dr. Hancock is a partner of the firm. Previously at GMO, he was Co-Head of the Global Equity team. Prior to joining GMO in 1995, he was a research scientist at Siemens and a software engineer at IBM. Dr. Hancock holds BS and MS degrees from Rensselaer Polytechnic Institute and a PhD in Computer Science from Harvard University.

"Our deep value actually has a reasonable amount of quality in it. So these are not sectorally declining, going-out-of-business companies we’re talking about. There’s actually some reasonable overlap with Quality Strategy holdings."