So-called value stocks fell half as much as “growth” stocks in Thursday’s market rout. You know who won’t be surprised? Ben Inker.
I caught up with the co–head of asset allocation at GMO, the white-shoe Boston money-management firm, earlier this week. Once again he was pounding the table in favor of “value” stocks, which GMO expects will beat growth by a wide margin over the next handful of years.
“Value” typically means stocks that are cheap in relation to current earnings and dividends. Growth stocks typically mean those that are expensive in relation to current earnings and dividends, but which the stock market bids up based on future prospects.
It is now just over 18 months since GMO launched a private hedge fund for institutions and well-heeled clients that simultaneously bets on “value” stocks and against “growth” stocks. The firm’s timing was terrific. It launched the so-called “equity dislocation” strategy in October 2020 — just as the market was about to start its dramatic shift from growth to value.
Returns since then, according to the firm’s most recent disclosure: 18%.
“It’s called Equity Dislocation because what we’re trying to do is make money for clients off of the dislocation we see among value stocks and growth stocks, around the world,” says Inker. The valuation gap between the two when GMO launched the strategy was about as wide as it had ever been, he says. “We launched it because we saw just about the biggest gap between value stocks and growth stocks — other than the TMT event (i.e. the technology media and telecoms or dot-com bubble of 1999-2000), there’s nothing else like it in the data.”
Inker thinks value is going to beat growth by a good margin in the years ahead.
What does this mean for the rest of us, trying to manage our 401(k) investments? It might be nice to be able to make money in any market by betting on some stocks and against others, but I’ve long been skeptical of hedge-fund strategies in general.
We can do ourselves a big favor by just investing in value. So long as stocks in general produce good long-term returns, if “value” wins we will do very well.
Inker says GMO still sees the best investment opportunities abroad, not in the U.S. GMO thinks Japanese and emerging-markets stocks offer the best trade-off of risk and return in the current environment, and especially (naturally) Japanese and emerging “value” stocks.
GMO’s version of “value” is more sophisticated than the ones you usually encounter in the markets. The firm factors in future earnings forecasts to create a discounted cash flow. “The value model that we’re using for this strategy is what we call price to fair value,” Inker says. “It’s a price-to-discounted-cash-flow model. It is willing to pay up for quality.”
Among the investment options available to the rest of us is Vanguard Value (VTV) for the U.S., iShares MSCI Japan Value
and iShares MSCI Japan Equal Weight
for Japanese value, and Avantis Emerging Markets Value
State Street runs low-cost exchange-traded funds that combine value, quality and low volatility in their stock selection: SPDR MSCI U.S. StrategicFactors
Emerging Markets StrategicFactors
The EAFE version is 25% invested in Japan.
Has the time for quality and value come? We shall see.