GMO recently released its Q3 2020 Quarterly Letter in which they discuss the disappointing run that value has had over a number of years and why now is the right time to exploit the value opportunity. Here’s an excerpt from the letter:
It has truly been a hellish time for Value. After years of disappointing investors, Value just experienced its worst 12-month performance in history. The long history of Value as a style shows that its best times are more or less always preceded by pain. As Value investors who have been suffering for it for over a decade, we can certainly attest that we have experienced enough pain to justify a wonderful run for Value stocks.
But you don’t have to simply take it on faith that Value is well set up for better times ahead. The relative valuations of these stocks around the world are some of the cheapest we have ever seen, and a decomposition of the sources of Value’s return since it peaked in 2006 shows that if valuations were to merely be stable at today’s levels and the underlying fundamentals for Value and Growth were the same as they have been over the last 14 years, Value would beat the market by a decent margin.
Of course, we believe relative valuations will not merely be stable from here but will rise back toward their historical normal levels. Whether that rise is driven by absolute gains for Value stocks in the next few years or avoidance of losses from the bursting of the Growth bubble is hard to say.
Over the next 5-10 years, most Value stocks around the world seem to us to be priced to give a decent real return, although that is more questionable for U.S. large cap Value stocks where absolute valuations are higher. For our part, we believe that the combination of a wonderful relative opportunity for Value and worrying absolute valuations for stock markets suggests that now is the right time to exploit this Value opportunity in a long/short framework, and that is the topic of the next part of this quarterly letter.
You can read the entire letter here:
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