The yearsfrom 1997 to 2000 were "unimaginably bad" for value investors such as GMO, says Ben Inker in a recent letter to investors. Not only did value stocks underperform drastically and emerging markets suffer a crisis, but not holding the hottest tech stocks could be hugely costly: leaving America Online (now AOL) out of GMO's US equity portfolio in 1999 by itself lowered returns for that year by more than one percentage point. But the "extreme pain" of that time which sent many clients running for the exits went on to create "the greatest opportunity set for valuation-driven investors since the Great Depression".
The parallels with today are striking. Recent market bubbles have not been as abrupt as the dotcom boom, but the cycle has gone on for much longer. The poor performance of GMO's value-focused equity and multi-asset investments "is once again approaching the 1990s-style cumulative pain level" and "unsurprisingly our clients are once again finding their patience wearing thin" (the firm's assets under management have roughly halved from a peak of $124bn in 2014).
Yet the "valuation extremes" in many assets are now as large as they were back in 2000. "Today's opportunities are not quite the same as the ones we had at our disposal 20 years ago;" developed-world value stocks are not as cheap as they were. But emerging-market value stocks are significantly cheaper. That should mean better times will eventually come for value strategies at least relative to the wider market.
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