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Ben Inker is GMO’s Head of Asset Allocation (GMO is a $118bn fund). In GMO’s most recent letter he offered some thoughts on the economy and the market. The title puts his argument pithily “Uncertainty has seldom been higher; oddly, neither has the stock market”.
Since March we have had six years of “normal” equity returns in the space of less than two months, “Meanwhile, our estimate of the downside risks to the global economy have not notably lessened.”
The GMO team have taken advantage of this contradiction by selling off equities and increasing long/short trades which allow increased exposure to relatively cheap shares but reduce “the portfolio’s sensitivity to overall market direction”.
I’m guessing, but I think what that means is that a lot of money is used to gain exposure to the upside of the market, e.g. going long by buying shares in, say Proctor and Gamble. This trade is matched by the same amount of money taking positions shorting a matched company, say Unilever, or shorting the market as a whole, e.g. through derivatives such as options or futures.
At the same time a bunch of deep value shares have been bought. Thus, the long/short combination allows them to be sanguine about the market’s movements – if it goes down they gain on the Unilever short say while losing on P&G long position, etc. But being long on value investments allows a good overall return when the neglected, unloved shares out-perform.
(I’ve gone someway down this road myself with a combination of put options on the Dow and the holding of value investments reducing my concern about market direction, i.e. I’m OK markets fall because I gain on the put options; and I’m OK if markets rise because I gain on the value shares)
Nothing but good news is expected
Inker says that the markets seem to be pricing in something close to the best-case scenario. This is possible if a vaccine/treatment is found quickly. But in the absence of that “we believe substantial losses would b………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
