Here’s how one hedge fund is going aginst the grain and beating the markets

Boston’s white-collar fund managers GMO – founded by Jeremy Grantham – have been taking the limelight this year with their “equity decoupling” investment strategy. The strategy, unveiled almost two years ago, buys the cheapest “value” stocks and then bets against the most expensive “growth” ones.

According to GMO reports, this “equity diversification” portfolio has gained a staggering 21% from October 31, 2021 to October 30, 2022. It has increased by 13 percent since January 1.

Its average rate has been 15% per year in 2 years.

If you’ve been living under a rock lately, that’s a lot different than anything else in the market today, including US and international stocks — which are down, double-digit in most cases.

The bad news for the GMO strategy is that the “equal mix” strategy isn’t available to the rest of us. It is an institutional fund and you need to invest millions to get in the door. Since it’s a hedge fund, they won’t tell us much about what it buys and sells. (Hedge fund managers avoid sharing too much information with us villagers, lest it overload our simple minds and drive us crazy)

The good news? We are not completely in the dark. If you want to follow the GMO strategy, there is information that you can use – if you want – in your 401(k), IRA or other retirement portfolios.

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By betting on some stocks and betting against others, the GMO strategy is a traditional “long-short” hedge fund approach that aims to make money, no matter what the market is doing, as long as the stocks they hold outperform their stocks. do better bet against.

Ordinary investors will have a hard time implementing the second half of that strategy, namely betting against expensive stocks, without more complex products. But they can, at least, easily embrace the first half and buy cheap things.

GMO revealed the top 5 stocks it owns in the portfolio as of October 31: IBM IBM,
Gilead Sciences GILD,
Cigna CI,
Biogen BIIB,
and German car company BMW BMWYY,

Even better, GMO’s co-head of asset allocation, Ben Inker, just revealed more about where the firm finds the best deals in the markets.

And it is changing.

Until recently, according to Inker, GMO’s equity allocation team was buying so-called “value” stocks, that is, cheap stocks based on current fundamentals such as dividends, earnings, etc. expensive by today’s standards, but those are big bets on the future.

Today they don’t just “value”, said Inker. They were buying what he called “deep value.”

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“Within the United States, ‘deep value’ (the cheapest 20%) is a truly segregated market segment,” he wrote in a third-quarter letter. still trading at 4% versus history.But the rest of the value universe is much less interesting.

As a result, he said, the equity allocation team now “focuses almost exclusively on this cheapest quintile of stocks.”

Inker wrote: “The pattern in value is an interesting type that has some meaningful implications for long-only portfolios.” (“Long only” refers to the type of portfolios the rest of us typically own, which invest in stocks and not against one or “short”). “Looked at this way, it seems that a value strategy in the US should avoid ‘shallow value’ stocks that are relatively cheap relative to the market and focus only on the ‘deep value’ slope,” he added.

The best investor I ever met, Allan Mecham at Arlington Value in Salt Lake City, Utah, used to joke about the concepts of “value” stocks and “deep value” stocks.

“It’s like asking someone, do you want a good deal — or a really, really good deal?” he told me.

Mecham, a disciple of Warren Buffett, Ben Graham and other “value” gurus, wanted to buy stocks as cheaply as he could. GMO doesn’t tell us what they consider to be “deep value” these days, although it is assumed that the top 5 stocks listed above are considered.

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But I asked S&P Global, which calculates the major stock indexes, about “deep value,” and they directed me to something they call the S&P 500 “Pure Value” index. This tracks stocks that have the purest, or deepest, value in the market.

The top 10 holdings in this index, as of November 30: Energy companies Marathon Petroleum MPC,
Valero Energy VLO,
and Phillips 66 PSX,
; Metlife MET insurances,
Allstate ALL,
PRU Financial Prudential,
and Everest Re RE,
; Cigna CI health insurance,
; agribusiness Archer Daniels Midland ADM,
; and Warren Buffett’s conglomerate Berkshire Hathaway BRK.B,

For those who like a simple life, the fund company Invesco runs the S&P 500 Pure Value ETF RPV,
which invests in the index and costs 0.35% per year. There is absolutely no guarantee that this fund, or this index, will replicate the positive half of GMO’s investment strategy.

Nor, for that matter, will that strategy work on the market.

Whether it will outperform, say, a simple stock market index is another matter. History provides reasons for skepticism. But it’s your money, and it’s your choice.


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