Magic Eludes Bubble-Caller Jeremy Grantham, as Assets at GMO Drop by More Than $40 Billion

Investor Jeremy Grantham’s money management firm is cutting its workforce amid client defections

By Gregory Zuckerman

Jeremy Grantham, co-founder and chief investment strategist of Boston money manager Grantham Mayo Van Otterloo & Co., has been out of step with the market before—and rebounded. Photo: Julien Warnand/European Pressphoto Agency

Investors are bailing on Jeremy Grantham once again.

Mr. Grantham, co-founder and chief investment strategist of Boston money manager Grantham Mayo Van Otterloo & Co., has been out of step with the market several times during the firm’s four decades. GMO has usually rebounded, with the 78-year-old investor earning acclaim with asset-bubble calls ahead of Wall Street busts in 2000 and 2008.

Lately, though, the firm is going through one of its roughest periods. Assets under management have tumbled to about $80 billion, according to someone close to the matter, down from a peak of $124 billion in June 2014. An acting chief executive has been running GMO for more than six months and the firm fired about 10% of its workforce, cutting some 65 jobs, in June last year.

Bearish about what it sees as high valuations of U.S. stocks, GMO’s flagship mutual fund, the GMO Benchmark Free Allocation fund, has largely missed out on the latest rally in U.S. stock indexes.

The fund held about 7% of its assets in U.S. stocks as of the end of September, with 27% in cash, 16.9% in developed markets outside the U.S. and 20% in “alternative” strategies such as global “macro” investing, according to the firm.

The GMO fund also had over 20% in emerging-market stocks and bonds—an investment that did nicely earlier in 2016 but has been under pressure in recent months.

As a result, the GMO Benchmark Free Allocation fund rose 3.4% in 2016, compared with a gain of about 5.7% for its peers, according to fund tracker Morningstar Inc., and a gain of 12% for the S&P 500, including dividends. The firm says the fund tries to beat inflation, which rose less than 2% over the past year.

“GMO has taken a lot of risk off the table, they think a lot of areas in the market are overvalued,” says Leo Acheson, a senior analyst at Morningstar. “They’ve definitely seen outflows, but they’ve been in this position before and looked bad for periods” before rebounding, he said.

Mr. Grantham once said he became interested in stocks at the age of 16, when a family friend shared an upbeat outlook for his company. Mr. Grantham bought up shares. Within about a year, the company was in an accounting scandal and the shares were worthless.

Today, the quarterly investing letter he and Ben Inker write is eagerly anticipated by many investors for the value approach they share. Mr. Inker is head of asset allocation at GMO.

Mr. Grantham’s following in the investment world began to develop in the late 1990s, when GMO adopted a cautious stance on popular-but-expensive tech stocks. Performance suffered and clients bolted; Mr. Grantham and his colleagues were rewarded when tech shares crashed and GMO’s results rebounded in the early 2000s.

Mr. Grantham and his team also were cautious ahead of 2008’s credit crisis, and they got bullish in early 2009, before the current rally began.

Some GMO funds have done better than the benchmark fund. The GMO Emerging Country Debt fund gained nearly 14% last year, including dividends, while the GMO Emerging Markets Fund gained 16.4%.

Still, the firm’s outlook appears out of step with a market that has climbed over the past few years and rallied sharply since the presidential election. In June 2015, Mr. Grantham said the Federal Reserve had artificially compressed interest rates, sending the market toward what he termed “bubbleland.”

In November, Mr. Inker wrote to clients that “almost all asset classes are priced at valuations that seem to guarantee returns lower than history.” Mr. Inker added that “from today’s valuation levels, there are no good outcomes for investors.”

To be sure, GMO’s troubles are shared by other value-oriented investors who have underperformed in recent years as growth stocks climbed. If the market hits a rough period, GMO’s caution will look prescient once again, and clients likely will return.

“Expensive markets have historically provided very poor risk-reward trade-offs,” Mr. Inker says.

“Our belief in the power of value has not wavered, it does not make sense to chase expensive markets ever higher.”

GMO was one of the first firms to emphasize an asset-class allocation strategy involving global investments. Its moves have been based on a view that markets move in seven-year cycles and that prices eventually will revert to normal levels, a reversion-to-the-mean strategy.

The lackluster results have led to some changes. In June, GMO said it would reduce its reliance on fundamental stock picking by one of its four equity teams and shift to a more-quantitative approach, resulting in departures of two top GMO executives.

Some clients say they’re unwilling to wait for GMO’s turnaround. Ventura County Employees’ Retirement Association withdrew its $211 million investment in GMO late in 2016. Among the reasons listed in an internal Ventura document: GMO’s job cuts and personnel changes, the shift in investment approach at the global-equity fund and GMO’s lagging long-term performance.

“GMO is a deep-value investor that takes a really long-term view,” said Dan Gallagher, chief investment officer of the Ventura County Employees’ Retirement Association. “But the board felt it was time for a change.”

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