Does GMO Add Value for Investors?
My series evaluating the performance of the market’s most prominent actively managed mutual fund families continues today with an in-depth analysis of the offerings from Boston-based Grantham Mayo van Otterloo (GMO).
Why GMO? The firm was founded in 1977, and Morningstar reports that as of July 31, 2015, the fund family had $115 billion in assets under management, making it one of the largest fund families. In addition, Jeremy Grantham, the firm’s chief investment strategist, is a highly respected money manager.
Grantham was the co-developer of the first index fund, making him particularly interesting from the perspective of this series. To quote Vanguard founder John Bogle: “In 1971, Batterymarch Financial Management of Boston independently decided to pursue the idea of index investing. The developers were Jeremy Grantham and Dean LeBaron, two of the founders of the firm. Grantham described the idea at a Harvard Business School seminar in 1971, but found no takers until 1973. For its efforts, Batterymarch won the prize for the ‘Dubious Achievement Award’ from Pensions & Investments magazine in 1972. It was two years later, in December 1974, when the firm finally attracted its first client.”
GMO’s website states that the company is “a global investment management firm committed to providing sophisticated clients with superior asset management solutions. Our sole business is investment management and, as a private partnership, we are accountable only to our clients and to ourselves. We forge strong partnerships with our clients, managing their money as if it were our own and offering them honest counsel. Our deep and talented investment teams are highly experienced and forward-thinking, investing with focused expertise in a wide range of asset classes.”
It adds: “GMO proudly serves some of the most prestigious and sophisticated investors globally, focused on providing them with great investment results.” It also observes that it has a sophisticated client base of mostly institutional investors, including corporate and public defined-benefit and defined-contribution retirement plans, endowments, foundations and financial intermediaries.
Here’s what it says about its investment strategy and how it serves clients: “Our approach seeks to identify asset classes and securities for which we believe we can get paid to take risk and utilizes a long-term investment horizon, a belief in the power of mean reversion, discipline, conviction, and a commitment to research. We are willing to take bold, differentiated positions when opportunities warrant and have the patience and fortitude to invest with a long-term perspective. We have managed portfolios through multiple market cycles and we constantly re-examine market opportunities across asset classes, testing our assumptions and embracing changing market dynamics. We utilize this deep experience to construct portfolios that we believe will offer our clients superior investment results.”
There is one question: Do the firm’s “deep and talented investment teams” deliver the superior results they’re focused on producing?
To answer that, I’ll compare the performance of GMO’s actively managed equity funds to similar offerings from two prominent providers of passively managed funds, Dimensional Fund Advisors (DFA) and Vanguard. (Full disclosure: My firm, Buckingham, recommends DFA funds in constructing client portfolios.)
DFA funds can be purchased through some 529 and 401(k) plans, but generally they are available only through an advisor. An investor would incur fees from that advisor; those fees vary greatly (in some cases they are very low) and cover the full range of financial planning services provided by the advisor. Also, John Hancock recently introduced a series of ETFs that are managed by DFA (with expense ratios that differ from the DFA funds cited in this article). Those ETFs can be purchased directly by investors. All Vanguard funds can be purchased directly by investors.
As is my practice, to keep the list to a manageable number of funds, and to ensure that I examine long-term results through full economic cycles, I will analyze the 15-year period ending December 31, 2015. I’ll use the lowest-cost shares available for the full period when more than one class of fund is available. And in cases where a fund family has more than one fund in an asset class, I’ll use the average return of those funds in my comparison.