Jeremy Grantham staked out familiar ground this month, scaling back risk in a market that his firm, Grantham Mayo Van Otterloo & Co. LLC, argues is once again on the cusp of bubble territory.
This time, however, the veteran of bubbles past expects his firm to suffer relatively modest fallout from being cautious too early.
In a May letter to clients, Mr. Grantham conceded there've been times over the past four decades when his propensity for getting out of overpriced markets too soon has “damaged the financial well-being” of money management firms he has served at — most recently when he bet against the tech bubble 2½ years before it burst in March 2000.
Over three torrid years through Dec. 31, 1999, during which the S&P 500 benchmark roughly doubled, client defections left GMO's assets under management mostly treading water at between $25 billion and $27 billion.
“We often arrive at the winning post with good long-term results ... but not necessarily with the same clients that we started out with,” the client letter noted.
In a recent interview about the firm's prospects in the current buoyant market, Mr. Grantham said, “I'm hoping I'm a little more accurate this time in the timing.”
For the past nine months, Mr. Grantham admitted to uncharacteristically, if incrementally, “going with the flow” — leaving two percentage points more in equities in GMO's asset allocation strategies than pure value considerations would have called for, in homage to the U.S. Federal Reserve's powers to puff up the market.
But a recent string of negative developments — including Japan's devastating earthquake and tsunami, and surging oil prices — on top of the looming end to the Fed's quantitative easing program, convinced GMO to “take that back off the table” in May, and be “strictly conservative,” said Mr. Grantham.
While admitting GMO's minor deviation from strict value rectitude left him feeling “slightly wicked,” Mr. Grantham concluded, “It was nice. It made us a bit of money, which we're happy to bank.”