Jeremy Grantham and Ben Inker have a long track record of successfully calling market bubbles, but their investment strategy can take a long time to play out.
Finding a truly exceptional asset manager is challenging, even for the most sophisticated investor. A clear and differentiated strategy, strong track record, history of great calls and willingness to learn are just a few of the indicators that tell the story. Competitiveness, confidence and conviction are also important, but, in the end, investing with anyone is a bet on risk.
Most investment managers try to work around these concerns by leading with the opportunities they see in the market or pointing to lofty end goals for those that invest with them. Its not often, then, that you go into a meeting with an asset manager and they open with risks: risks to the market, risks to your investments and, indeed, risks to your career if you follow their ideas all the way through. But thats what you get with Grantham, Mayo, Van Otterloo & Co., the Boston-based shop co-founded by famed value investor Jeremy Grantham.
Using an approach created by the British-born Grantham, GMOs managers look at asset valuation trends over the entire history of the market and use those as the basis for determining fair value. Within those historical trends GMO has identified a consistent pattern: Asset classes have average values that dont really change much over time. Valuations may go up or down for certain periods, but they always come back to the mean. Because the firm sees markets through this mean-reversion lens, GMO tracks how bubbles are forming and the risks if they burst. The firms managers invest by looking for low-risk, cheap assets that are likely to perform well as bubbles form and easy to get out of just before the inevitable happens. The firms seven-year forecast, which it releases publicly, provides a live snapshot of how markets are changing over time.
Over its 39-year history, GMO has built a reputation for being the smartest guys in the room when it comes to long-term value, having successfully called all of the bubbles in recent memory but that comes at the expense of almost everything else. When you walk through GMOs front door, youll find an outlier not just among value shops but among investment firms. There are no fancy presentations touting a wealth of golden opportunities, no branded golf balls to take away. What you get instead feels a bit more like a visit to a think tank, with researchers who are on the brink of their next great discovery and only want investors willing to stay on until they find it.