An Update on the Current Environment Amid COVID-19

Facing turbulent markets and concern for the health of our clients, colleagues, families, and friends, I’d like to provide you with an update on how we are managing our Asset Allocation portfolios through the current environment.


  • We believe that COVID-19 need not materially change the fair value of equity markets, although this belief assumes that governments will take appropriate steps to help economies and companies make it through the current period.

  • We continue to follow our long-term, patient, valuation-sensitive process.

  • Equities are meaningfully more attractive than they were at the start of the year, given the large fall in their price.

  • We stand ready to act as liquidity providers to capitalize on market overreactions and dislocations.

  • The opportunity set for dynamic asset allocation today remains one of the best we’ve ever encountered due to the dispersion in valuations globally. COVID-19 does not change that.

  • Assessing Fair Value (Which Has Been Remarkably Stable Historically)

Assessing Fair Value (Which Has Been Remarkably Stable Historically)

We use a long-term, valuation-based perspective to consistently rotate our Asset Allocation portfolios into what we believe are the most attractively priced areas. As with any valuation exercise, the assessment of long-term, fundamental fair value is critical to determining current attractiveness. While there will be a severe short-term economic toll (whether it is officially a recession will depend on the length of the economic shutdown, which is unclear at the moment) resulting from COVID-19, we do not believe it will have an enduring impact on the fair value of global equity capital. The fair value of equity markets has been remarkably stable historically; the only events in our experience to truly impair it have been major wars, the Great Depression, and, for global banks, the 2008-2009 Global Financial Crisis (GFC). Most recessions, even deep ones, do not leave a lasting mark on the economy or the financial markets, nor have previous global pandemics.

Case Study: Spanish Flu Pandemic of 1918-1919

The most severe pandemic that may be in any way comparable to what would be a very bad scenario for COVID-19 was the Spanish Flu pandemic of 1918-1919. Given that it occurred more or less simultaneously to the end of World War I and was followed by a serious depression in 1920-1921, it would be difficult to determine exactly what fair value loss was driven by the pandemic, the war, or the depression. But at some level it doesn’t matter which we blame, as the loss of “clairvoyant” fair value for the S&P 500 from the peak to the trough was 1% from 1911 to 1918, as seen in Exhibit 1.


Source: Robert Shiller, GMO. Clairvoyant fair value is based on the next 50 years of dividends and earnings. The red series is an approximation of clairvoyant fair value given a shorter history. The dotted series is our best guess as to what fair value has been over the past 20 years.