Thursday, November 5, 2015

Negative Fund Flows At Grantham, Mayo Fund And What That Implies

As usual, apologies to Mr. Van Otterloo for relegating him to the same limbo of the innocents as Pierce, Fenner, Smith and Beane. Especially Beane.

For what it's worth we are still targeting S&P 2250, although with today's close at 2099.93 we are a lot closer to the target than we were on August 25 when it closed at 1867.61.
And, again for what it's worth, 2250 is the number Mr. Grantham mentioned in a burst of enthusiasm in early-to-mid 2014.

From EconomPic:

GMO Flows Turn Negative - An Ominous Sign for Risk Taking
I have a ton of respect for the way in which GMO manages money (their guts to be massively contrarian if that is their view) and I think their thought leadership is about as good as it gets in the industry. That said, I have long had an issue in the way in which they think about investor behavior from a client perspective, which is they broadly ignore it.

This was the genesis of my tweet from late last year.

As unnecessary as it may seem, contrarian investment managers need to be even more consultative with their clients than those that are more aligned with market sentiment, otherwise clients won't be able to handle the extended periods of underperformance a contrarian investor is likely to face from time to time. In the case of GMO, while the long-term performance of many of their strategies are pretty strong (and tend to materially outperform when markets turn), the performance captured by their investor base is typically quite poor. One example being the GMO Benchmark Free Allocation, a fund in which the average investor has underperformed the fund by 3-5% over 3, 5, and 10 years. As a result, despite a 16th percentile Morningstar rank in terms of fund performance over 10 years, investor performance only ranks 74th.

In other words, their investor base historical zigs when they should zag... putting money to the contrarian GMO after markets have tanked (when they should be taking market risk) and piling out of the contrarian GMO after markets perform well (when they should be taking risk out of the market). Thus, it was relatively alarming to see that funds flows at GMO have been negative $4.2 billion over the twelve months through 9/30/15, including almost $3 billion of outflows the last two months of the third quarter alone....