A Second Opinion Is Just What the Doctor Ordered

GMO

Ben Inker

Research

9 Pages

This paper critiques the traditional 60/40 portfolio approach and advocates for a valuation-sensitive, dynamic asset allocation strategy. It outlines how GMO’s Benchmark-Free Allocation Strategy adapts to market dislocations to improve risk-adjusted returns.

Key Takeaways

60/40 has limits: Historically strong, the 60/40 portfolio faces headwinds from high U.S. equity valuations and tight credit spreads
Valuation drives strategy: GMO’s approach reallocates away from expensive assets into undervalued opportunities like Japan small-cap value and deep value stocks
Dislocations create alpha: Long/short strategies exploiting the spread between deep value and extreme growth offer diversification and rebalancing benefits
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