Quarterly Letter 3Q 2020

GMO

Ben Inker, John Pease

Research

20 Pages

GMO argues that value stocks are trading at historically extreme discounts after their worst 12-month stretch on record, setting up a potential reversal versus growth. The paper suggests more than 100% of value’s underperformance since 2007 is due to valuation compression, not fundamentals, while growth stocks may resemble a 2000-style bubble poised for mean reversion.

Key Takeaways

Historic Value Cheapness: Value stocks hit their worst 12-month performance ever, leaving them at some of the lowest relative valuations observed across major global equity markets.
Valuation Driven Underperformance: Over 100% of value’s lag since 2007 is attributed to falling relative valuations, implying underlying fundamentals have not deteriorated materially.
Long Short Opportunity Setup: Prior GMO long short strategies during the TMT unwind delivered 80%+ cumulative returns, highlighting potential asymmetry if value rebounds and growth compresses.
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