When a friend gave Ben Inker a custom-made sweatshirt with “JOMO” — the Joy of Missing Out — emblazoned on the front, the co-head of asset allocation at asset manager GMO knew he had the title for the firm’s fourth-quarter letter.
That’s because the letter addressed the silver lining of the bear market in 2022: Investors finally had an opportunity to buy assets and strategies that are either cheap or at least fairly priced. And that means that if markets still decline more, the dangers are more about being too late getting back into the markets than being too early.
In an interview, Inker said that what was common among the few things that did well last year — a list that includes resources, resource companies, commodities, global macro, and strategies that were long value and short growth — was that “a lot of investors had given up on them.” Global macro was a hot strategy after the global financial crisis because it had protected portfolios during the market decline, but it then went on to disappoint investors when other investments did well. The same was true of value over the last 10 years. As Inker put it, “The only things that didn’t lose money [last year] were things you had to be pretty aggressively contrarian [about] to even contemplate.”
On the flip side, speculative growth stocks and assets such as crypto — which had extreme valuations and which had done very well in 2020 and 2021 — had, according to Inker, “required some sort of aggressive new-era thinking that the normal rules don’t apply and that your standard analysis had to be thrown out the window. They deserved what they got [last year]. The assets made no sense.”
In contrast to the case that GMO’s Jeremy Grantham made earlier this month — that the declines in 2022 were only the start and that more pain was coming — Inker said, “Even if you can’t sound the all-clear, everything is more attractively priced today than it was a year ago. People need to recognize that the problem with 60-40 a year ago was not that it was broken, it was that the 60 and the 40 were very expensive.”
Inker’s favorite portfolios a year ago were filled with liquid alternatives or non-traditional assets because it was the worst environment ever for stocks and bonds. GMO is still bullish on those. “A year ago, where we had the flexibility — and to be clear we didn’t always have that flexibility — to move to liquid alts, we wanted to do that with as much rope as someone would give us,” he said.
A year ago, GMO had 61 percent of its benchmark-free allocation strategy in liquid alts, with the single biggest position in an equity dislocation strategy, which is long global value and short global growth stocks. The allocation strategy also had 10 percent in a global macro portfolio, 7.5 percent in a relative value and carry product, and 18 percent in other slightly less aggressive equity long-short products.
Today, equity dislocation remains GMO’s favorite liquid alt, even though it clocked double-digit returns last year. The manager also expects that the systematic global macro strategy, its second-largest position last year, will be able to exploit mispricings this year.
But the asset allocation strategy will have larger positions in traditional stocks and bonds, which again look much more attractive from a valuation perspective. A year ago, stocks made up 28 percent, credit represented 11 percent, and alternatives were 61 percent of the portfolio. Today, stocks represent 44 percent, credit is at 18 percent and alternatives have dropped to 38 percent.
GMO brought up its stock allocation in part by buying value. The firm believes that value remains at attractive prices globally. But deep value is the best opportunity.
“In the U.S., a strong year for value didn’t actually do as much for the cheapest value stocks as one would have expected,” Inker wrote in the letter. “When bad things happen to relatively cheap assets, it generally creates a good buying opportunity, and we believe emerging equity and debt and U.S. deep-value stocks are well worth investing in today.”
