With the S&P 500 down more than 15%, the Nasdaq down over 25%, and the Russell 1000 Value down 9.37%, most investors would deem the 2022 equity market pure chaos. But Ben Inker, co-head of asset allocation at GMO, finds the market less “dislocated” than in the previous decade, according to an interview in CityWireUSA. Back in October 2020, GMO launched its Benchmark-Free Allocation fund (GBMIX) to play against the meteoric rise in growth stocks and the stagnant value stock market by owning value stocks and shorting growth stocks. That strategy has been richly rewarded in 2022.
About 20% of GBMIX is the long-short strategy. It’s up 7% through the first quarter of this year, and 18% on an annualized basis since it was created. And it’s almost a guarantee that its added gains since then, with the Russell 1000 Value index down 8.2% and its counterpart Growth index down 19% from April 1-May 18. But Inker says that GMO utilizes a different metric than the Russell indexes to determine value, telling CityWireUSA that the company’s quant equity team reconstructed “income statements and balance sheets of all 10,000 companies in our database” in order to come up with reasonable estimates of the earnings and returns on their invested capital. Indeed, Inker doesn’t believe that book value is the right way to appraise a company; so many companies are currently trading at negative book value but aren’t at any risk of going under, he maintains, citing McDonald’s as a good example.
The long-short strategy has kept GBMIX steadier than many of its peers; the fund is down 2.3% this year and in the top 14th percentile of Morningstar’s Global Allocation fund category. Aside from its long-short allocation, the fund has some exposure to alternative strategies, as well as a 30% long position in equities that consists of emerging markets, Japanese and European value stocks. Though GMO has traditionally favored emerging markets stocks, Inker told CityWireUSA that “the gap between emerging and developed foreign value has shrunk,” though he noted that there is still value to be found in emerging markets equities.
But the market Inker seems most interested in is Japan, according to the article, where he believes the culture is shifting away from its reputation for not being efficient or producing high returns on invested capital—a belief that may still take a while for other investors to come around to.
