Swedroe: Debunking Grantham’s Concerns

July 18, 2014

Grantham says the market is overvalued, but has he been good at exploiting the opportunities he sees?

“For some months now, Jeremy Grantham, a respected market strategist with GMO, an institutional asset management company, has been railing about the efficient market hypothesis.”

So began a June 6, 2009, New York Times article by Joe Nocera. He went on to note: “While Grantham was an early advocate of index funds for unsophisticated investors he believes that professionals should do better precisely because the market is full of major league inefficiencies.”

One of my favorite hobbies is collecting opinions such as Grantham’s and saving them for review at a later date. I saved this one because Grantham is one of the market’s most respected value investors, and his views often receive wide media coverage. Grantham has been “railing” for some time now about the market being vastly overvalued.

He points to currently high price-to-earnings ratios and to record-high profit margins, and believes that we should expect to see a big market correction. For example, in the quarterly newsletter that he released in February 2013, Grantham wrote: “All global assets are once again becoming overpriced.”

He added that domestic companies—other than “quality” stocks backed by stable earnings and low debt—and most global growth equities are “brutally overpriced.” Do his forecasts, and the forecasts of others like him, have value? It’s an important question for investors to ask.

To test Grantham’s ability to add value based on his unique insights, we’ll check Morningstar’s database to find GMO stock funds that have at least a 15-year track record and are either international or domestic funds, as opposed to global funds.

Using the latest data available, the following table presents returns for five GMO stock funds that meet our criteria. Since GMO is a value manager, we’ll then compare their returns to the returns of similar funds managed by Dimensional Fund Advisors (DFA). (Full disclosure: My firm, Buckingham, recommends Dimensional funds in constructing client portfolios.)


So that we can include additional funds in our analysis, we’ll now consider other GMO funds that have at least a 10-year history. We’ll once again compare GMO’s international large value funds against DFA’s international large value fund. And, for consistency purposes, we’ll compare GMO’s domestic large blend fund against DFA’s large company portfolio.



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