Financial Corner | Econoshock.be

Don’t miss the Bloomberg article on Jeremy Grantham. It highlights all the problems facing an investor manager that thinks first about the risks, and then the possible returns. Grantham has been right on all the major swings, but he has been right too early according to the critics.

Jeremy Grantham is co-founder of asset manager GMO.

Apart from the list of right calls, the article tackles the problem of being bearish and being “commercial” at the same time. It appears that clients leave a company that is too bearish, even if it proves to be right.

Jeremy Grantham warned in January 2000 that U.S. equities were “more overpriced than at any time in the last 70 years due to the massive overpricing of technology and especially dot-com stocks.”

By the end of 2002, the Standard & Poor’s 500 Index had fallen 40 percent and technology shares were down 73 percent. The forecast didn’t help his firm, Grantham Mayo Van Otterloo Co., because he’d been bearish since 1997. Assets declined 45 percent in the late 1990s as customers sought out better- performing mutual funds that liked the technology stocks Grantham disdained.

Moreover, the fund managers of GMO did not always follow Grantham’s (correct) calls:

GMO’s funds usually don’t fully adopt his recommendations, or hedge their bets, underscoring the difference between being a star strategist and successful money manager. That’s true for the fund Grantham works most closely with, GMO Global Balanced Asset Allocation, which oversees $3.1 billion.

There is a double problem: asset managers get a bonus when they beat a benchmark after the calendar year, not after two or three years. This causes a short term bias. On the other hand, clients also focus more on opportunities than risks:

The tension between acting on a long-term vision and keeping clients happy in the short run is a fact of life for all money managers, said Charles Lieberman, chief investment officer at Advisors Capital Management LLC in Hasbrouck Heights, New Jersey, which oversees about $190 million. “The issue is: Are you willing to stick your neck out and how far?” he said in a telephone interview.

The tension is heightened at GMO, where Grantham’s warnings of investment bubbles have at times sent customers packing for firms with a more upbeat view of the markets.

“If we are too aggressive, and we don’t get it right, we run the risk of being fired,” Ben Inker, GMO’s head of asset allocation, said in a telephone interview.

But Jeremy Grantham is not always right because of a bearish stance:

In March 2009, when the S&P 500 index bottomed out at 676, Grantham wrote that fair value for the benchmark of the largest U.S. stocks was 900, or 33 percent higher. By July, with the index above that mark, Grantham concluded U.S. stocks had become too expensive again.

“After 20 years of more or less permanent overpricing, we get five months of underpricing,” he told newsletter readers. “There is no justice in life.”

The fair value of the S&P 500 is 850, 23 percent below today’s 1105, said Grantham. He arrives at that valuation by assuming a long-term average price-to-earnings ratio of about 15 for U.S. stocks and applying it to a long-term average for profit margins.

The debates he had with Jeremy Siegel, a Wharton professor and rather agressive perma-bull on stocks, have been legendary. Siegel still defends that you lose money with Grantham’s advice:

Jeremy Siegel, who has squared off with Grantham in a series of bull-bear debates over the past decade, said Grantham can cost investors money by being so early with his calls.

“There have been periods when he would have kept people out of the market while it was still rising,” said Siegel, a finance professor at the Wharton School at the University of Pennsylvania in Philadelphia and author of the book “Stocks for The Long Run.”

No ‘Permabear’

Siegel forgets that a bearish stance over the last ten years, was the right attitude, and not his permanent bullish view. All in all, a lot more investors lost a lot more money with bullish advice since 2000.

Grantham dismisses his “permabear” label, saying that in 2000 he was bullish on emerging-market stocks, real estate investment trusts and inflation-adjusted bonds. GMO data show that the three asset classes returned between 4.9 percent and 8.1 percent a year in the 10 years ended Dec. 31. The S&P 500 lost 1 percent a year over the same stretch.

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