How to Invest Now as 401(k) Reservoirs – According to a Leading Fund Manager

So-called “value” stocks fell half as much as “growth” stocks in Thursday’s market rout. You know who won’t be surprised? Ben Inker.

I met with the chief investment officer of GMO, Boston’s white fund management firm, earlier this week. Once again, he was beating the table in favor of value stocks, which GMO expects to beat growth by a long shot over the next few years.

Value stocks generally refer to stocks that are cheap relative to current earnings and dividends. Growth stocks generally refer to those that are expensive relative to current earnings and dividends, but the stock market rises based on future prospects.

It has now been just over 18 months since GMO launched a private hedge fund for institutions and high net worth clients that simultaneously bets on “value” stocks and against “growth” stocks. The timing of the business was great. They launched the so-called “equity dislocation” strategy in October 2020 – just when the market was about to begin its dramatic shift from growth to value.

Yield since: 18%, according to the company’s latest publication.

“It’s called Equity Dislocation because what we’re trying to do is make money for clients through the dislocation we’re seeing between value stocks and growth stocks, all over the world. “, explains Inker. The valuation gap between the two when GMO launched the strategy was about as wide as it has ever been, he says. “We launched it because we saw about the biggest gap between value stocks and growth stocks – aside from the TMT event (i.e. tech media and telecommunications or the “dot-com” bubble of 1999-2000), there’s nothing else like it in the data.”

Inker thinks value will beat growth by a healthy margin in the years to come.

Thursday: Vanguard Value VTV,
fell about 2%, but Vanguard Growth VUG,

What does this mean for the rest of us trying to manage our 401(k) investments? It can be nice to be able to make money in any market by betting on certain stocks and against others, but I’ve long been skeptical of hedge fund strategies in general.
We can do ourselves a great favor by simply investing in value. As long as equities in general produce good long-term returns, if “value” wins, we’ll do just fine.
Inker says GMO still sees the best investment opportunities overseas, not in the United States. GMO believes that Japanese and Emerging Markets equities offer the best trade-off between risk and return in the current environment, and in particular (naturally) Japanese and Emerging Value equities.

The GMO version of “value” is more sophisticated than the ones you usually encounter in the markets. The company takes into account forecasts of future earnings to create a discounted cash flow. “The value model we use for this strategy is what we call the price-to-fair value ratio,” he says. “It’s a price/discount cash flow model. He is willing to pay for quality.

Among the investment options available to the rest of us are Vanguard Value (VTV) for the US, iShares MSCI Japan Value EWJV,
and iShares MSCI Japan Equal Weight EWJE,
for Japanese value, and Avantis Emerging Markets Value AVES,
to emerge. State Street manages low-cost exchange-traded funds that combine value, quality and low volatility in their stock selection: SPDR MSCI US StrategicFactors QUS,
EAEO (international) QEFA,
QEMM Emerging Markets Strategic Factors,
and QWLD World,
The EAFE version is 25% invested in Japan.

Has the time for quality and value come? We will see.

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