BOSTON -- Long known as a value manager, Grantham Mayo Van Otterloo & Co. is starting to gain more recognition for its strength as a growth manager.
The firm's growth potential attracted the attention of the Vanguard Group Inc., Malvern, Pa., which recently hired GMO to help manage the small-cap growth Vanguard Explorer Fund.
The subadvisory relationship is something that's new for this Boston-based firm, which manages $24 billion in assets. Grantham Mayo joined the $4.4 billion mutual fund's four-firm management team in March. The portion of the fund that Grantham Mayo will run has not yet been determined.
In March, Vanguard also hired Grantham Mayo to manage the new Vanguard U.S. Value Fund, which is currently in registration with the Securities and Exchange Commission.
Joel Dickson, principal at Vanguard, said his company looks to forge subadvisory relationships with well-established firms with "deep investment teams," and Grantham Mayo fit the bill. He said the company clearly demonstrated its growth management capabilities through the growth components of its quantitative group funds.
"We saw a great opportunity to strike up a relationship with GMO on the value side and the growth side," said Mr. Dickson.
Area of interest
Grantham Mayo would like to continue pursuing its new role as a subadviser. "It's an area that's of interest to us," said Christopher Darnell, chief investment officer, global quantitative investment group, "because we have capabilities to blend the two antithetical styles together in portfolios and we believe we can assemble those pieces to custom create a portfolio for clients."
The firm is unique in having three major groups that operate separately from one another. The U.S. equity and international equity groups are active pure value managers, while the global quantitative group is value-oriented, although it leaves room for growth in its portfolios. The strategy is to have value and growth work side by side, with the majority of a portfolio -- about 70% -- in pure value stocks, and the rest in pure growth or momentum-type stocks.
"We really have a Chinese wall between the high-octane stocks in the portfolio and the value stocks. The value approach that we use is pure value," said Mr. Darnell, as opposed to relative value. "Then we have a part of the portfolio that's segregated off, where we keep the caged animals," the growth stocks that have been driving the market in recent years.
The global quantitative approach is something that's not typical in the world of money management. "I think it is unusual to have two distinct elements within one product," said Jeff Nipp, head of investment research at Watson Wyatt Worldwide, Atlanta. "I would say the way GMO gets there is a little different. At the end of the day, I'm not sure what you get is all that different from someone who's using a multifactor model that has growth and value components to it."
Grantham Mayo's quantitative strategy first incorporated the growth/value approach in its U.S. Core Fund in 1983. It's still used today in the $3 billion fund, which is the group's largest. Through the years, the quantitative group's mutual fund lineup has expanded to include a variety of offerings, including an emerging markets fund.
The Vanguard U.S. Value Fund will be designed with the same 70/30 value to growth ratio that GMO's U.S. Core Fund has.
Breaking the waves
Throughout the 1990s the growth portion of the strategy kept the portfolio from drowning. "It enabled us to get S&P 500-type numbers," said Mr. Darnell. "It kept us at least at the surface of the ocean."
The U.S. Core Fund has posted consistent returns that have been right around the Standard & Poor's 500 stock index with three-, five- and 1 0-year returns of 26.5%, 26.2%, and 19.1%, respectively, for periods ending March 31. For the one-year period ended March 31, the fund garnered a 18.9% return. In comparison, the S&P 500 posted three-, five- and 10-year returns of 27.3%, 26.7% and 18.5% respectively. For the one-year period ended March 31, the S&P 500 returned 17.9%.
"With a pure value approach, those returns would not have been possible,"said Mr. Darnell. "We haven't found the Holy Grail of value investing. We're not walking on water with a value approach that was given to us through divine inspiration and performed well when all others haven't."
A quantitative approach that relies on computer screens and processes to determine the best growth and value stocks to include in the portfolio make combining the styles easier, said Mr. Darnell.
And because Grantham Mayo pursues both styles aggressively, he said, it would be "pretty schizophrenic" for a human to pick the stocks and believe passionately in both styles. "But the computer doesn't show any signs of having any mental health problems at having to do both at once."
Mr. Darnell said the global quantitative group is biased toward value because it is the strategy that the firm believes is the best in the long run.
