- Legendary investor Jeremy Grantham, who co-founded GMO, has made his name calling and capitalized on market bubbles.
- In 2021, GMOs revived the strategy Grantham used to exploit the dot-com bubble and are back 13% this year.
- Here’s how GMO is now starting to unfold with the major relaxation taking place in the market.
Legendary value investor Jeremy Grantham, who co-founded the investment firm Grantham, Mayo & Otterloo, has made his name calling out and capitalizing on market bubbles, from the Japanese asset price bubble to the internet crash of 2000 and the housing crisis in 2008.
In the lead-up to the dotcom crash, he implemented a strict long-term strategy. It returned 80.3%, net of fees, from October 1, 2000 through December 31, 2002 when most investors suffered heavy losses.
Then in early 2021, Grantham again called a stock market bubble
Deploying easy monetary policy to stimulate the economy in light of the pandemic and increase risky assets as a result.
Shortly after that call, Ben Enker, his right-hand man and head of asset allocation at GMO, announced that the company was reviving the dot-com era strategy, now known as GMO’s equity offsetting strategy.
It was intended to take advantage of the unusual discrepancy between valuations on value and growth stocks.
When the Fed began tightening policy at the beginning of this year, the market bubble began to collapse. The S&P 500 is on the brink of a bear market, having fallen 14% year-to-date.
Meanwhile, Enker’s $5.3 billion equity strategy has returned 13% to investors through April 30.
Now with big relaxation in full swing, Inker shared an update on his latest status in a recent post.
His thesis focuses on growth traps, a pocket in the stock market that Enker first referred to last year at the height of the bubble.
Growth traps are not as well known as value traps, which are companies that look very cheap on the surface, but frequently disappoint, with lower growth and revenue lowering future multiples.
About 30% of stocks in the MSCI Index of American Value are value traps and underperform the index by 9% on average, according to Inker’s note.
On the other hand, growth traps are stocks with unrealistic growth expectations set by the market, which they cannot fulfill.
“When these prospects deteriorate, ratings drop almost invariably, often rapidly,” Enker wrote.
GMOs have found growth traps to be more popular, making up 37% of the US MSCI Growth Index and underperforming 13% on average, according to Inker’s note.
Inker began his observation that Netflix (NFLX), Coinbase (COIN), Peloton (PTON), and Palantir Technologies (PLTR) are all growth traps. Each of these stocks has lost more than 50% of its value since its highs in 2021.
“Since last spring, the trap ratios for both value and growth have gone up, and based on history, I don’t want to bet they’re going back down anytime soon,” Inker warns investors.
It shows that the weights of traps are high in recessions, especially in the early stages of recovery from recessions. With many economists and investors forecasting a recession late this year or early next, investors may want to tread carefully when exploring areas of growth in the market.
“But what should be noted for all investors regardless of their status is that current conditions suggest that there will likely be more growth traps next year than there was last year and there is good reason to believe that their underperformance will continue to be worse than usual until a breakup occurs. full of growth bubble”.
However, that doesn’t mean that all growth stocks are a bad bet. Team Inker has purchased some recent shorts.
“Very entertainingly for those of us who are managing value for a long/short growth strategy — in the case of GMOs, an equity crackdown — we’ve actually found ourselves in recent months buying a bunch of ex-shorts as they ‘trapped’ all the way across the bay From exaggerated growth stocks to undervalued opportunities.”
Another area of GM stocks that has turned bullish recently is resource stocks, which are companies that produce natural resources and commodities, such as Vale (VALE), Glencore (GLCNF) and Mosaic (MOS).
A separate note penned by Lucas White of GMO, a portfolio manager on the Concentrated Equities team, demonstrated the benefits of the “unwanted” subset of stocks.
“Historically, resource stocks have performed stellarly during periods of inflation and this time was no different,” White said in the note. “Resource stocks have been the top performing asset class over the past two years, yet they continue to trade at very attractive levels that do not reflect current commodity prices.”
However, White cautions, investing in the resource sector is not for the hard of hearing.
“There is a significant dispersion in the attractiveness of companies within the sector, investors need to monitor capital allocation programmes, and
Within the sector it produces entry/exit points that must be navigated gracefully.”
“Despite the challenges, investors willing to wade into these waters are likely to receive generous rewards,” he added.