Jeremy Grantham
Jeremy Grantham, co-founder in 1977 of value equity quant shop Grantham, Mayo, Van Otterloo, has moved on from trying to beat benchmarks to bigger game: trying to save the world.
Over the past decade, “I kind of disengaged from money management and took on the responsibility — self-imposed — of dealing with long-term, underrated problems: climate change, resources limitations, population bust, toxicity and, if you insist, acute inequality,” Grantham said in an interview.
The veteran money manager remains a “propagandist” for GMO but has otherwise let the firm’s leadership “get on with it” — even as a dominating run for U.S. growth equity stocks for much of the past 15 years has proven a tough backdrop for GMO’s hardcore value style.
Grantham’s focus today on big, destabilizing, systemic challenges effectively leaves him at the forefront of an ever-growing army of impact investors, eyeing venture capital as the corner of the asset management universe best positioned to address issues threatening “our very survival,” he said.
The $1.5 billion Grantham Foundation for the Protection of the Environment, set up in 1997, is Grantham’s vehicle for seeking out and supporting the “heroic new ideas” needed to address those challenges — a task which he sees as not necessarily out of reach for the U.S. venture capital industry.
Venture capital is something the U.S. does very well at a time when American capitalism is otherwise “nothing to write home about … fat and happy … designed for the unusual enrichment of a relative handful of capitalists,” Grantham said.
VC, by contrast, is “actually doing a useful job,” driven by people who are extremely concerned about issues such as climate change, Grantham said.
If he were looking to launch a new investment management firm today, Grantham said he would either launch a venture capital firm focused on green tech or a green tech startup itself.
“Over the past 25 years, I’ve become persuaded that there are … very, very serious issues, any one of which is much more serious than messing around with stocks, and they are matters of our very survival,” he said.
The broader backdrop for the global system, meanwhile, is “fraying at the edges” now, said Grantham, in part because the rich and powerful continue to accumulate ever greater wealth and power — an outcome Joseph Schumpeter, one of his heroes in the economics pantheon, predicted would eventually lead to the bogeyman of Schumpeter’s day — a socialist backlash.
That tendency of capitalism to concentrate wealth in a few hands “can do things a lot worse than socialism and if we’re not careful, it will,” warned Grantham, noting “the line between where we are now and mild fascism is not a big journey.”
Workers in the U.S., meanwhile, are disgruntled — and not without reason, Grantham said.
“Labor has been screwed by capital, fairly profoundly in the U.S., where almost all the benefits of the last 50 years (have) accrued to the benefit of the rich,” he said. Henry Ford would have said “‘If you don’t pay a decent wage, dudes, how are they gonna buy my car. ‘We’re committing the mistake that Henry Ford did not,” he said.
Asked where he finds himself now on the spectrum between hope and despair, Grantham conceded to oscillating lately between “substantial pessimism and substantial optimism.”
“I can get pretty pessimistic as you appreciate some new problem. And I can get pretty optimistic when I finish meeting with some brilliant new group who have some idea that may save our bacon,” he said.
Grantham said he has restructured his foundation over the past three or four years in order to double down on finding and supporting those ideas.
For the foundation’s first 22 years, Grantham said he and Ramsay Ravenel, the foundation’s president and CIO, focused 90% of their time on grant-making and only 10% on investing. But then, “three or four years ago, as we built up our own team, we decided that actually the best example we could set and the most use we could be was to drive our mission much harder with our foundation, and in order to do that, and scale up quickly, our main effort for that three-, four-year window moved to investing over grant-making” — with a current split of 75% investing to 25% grant-making, he said.
The foundation’s enhanced investment operations target four buckets, which should eventually claim 25% each of the foundation’s capital.
The first, Grantham says, is green venture capital, focusing on carbon sequestration and “run by our own team of seven people,” led by managing director Kevin Tidwell. The team has invested a combined $230 million in 65 sequestration deals and looks set to raise that figure to roughly 90 in fairly short order, he said. Investments that Grantham and Ravenel made in this area prior to building up an internal team are being moved over time into the foundation’s main portfolio, called “neglected climate opportunities,” said Grantham.
The next 25% of the foundation’s capital — which Grantham said came from contributions he made year by year from everything he earned that he didn’t spend to live — is targeted for “green venture capital funds run by other people,” overseen by investment and consulting giant Cambridge Associates.
The third bucket is “what we call ‘the best of the rest’ — venture capital that’s not green,” again advised by Cambridge Associates and aimed simply at generating the returns needed to “drive the foundation forward,” Grantham said. Cambridge, under David Thurston, a longtime managing director of Cambridge’s private client practice, has delivered on that score, with the foundation’s “best of the rest” exposures averaging annual returns of 19%, he noted.
That “best of the rest” allocation stands, for now, at roughly 30% while the bucket with green funds overseen by external managers, only 18 months into its lifespan, steadily works toward its 25% target, Grantham said.
The remaining 25% sleeve, meanwhile, is a liquidity bucket, focused on funds — “likely to do as well in a bear market as a bull market” or slightly better — that can be accessed in 30 days or less, Grantham said. Having that cushion is crucial for a VC market segment that seems to get slammed every 15 years or so, as it’s getting slammed at the current moment in time, he said.
The liquidity bucket is invested in three GMO funds: an “equity dislocation” hedge fund, which goes long cheap stocks and shorts expensive ones; the firm’s “quality spectrum” hedge fund, which maintains 170% exposure to high-quality stocks offset by a 70% short position in “junk” stocks; and GMO’s systematic global macro hedge fund run by the firm’s team in Australia.
The foundation’s repositioning to pack a bigger venture capital punch remains a work in progress, at a time when VC is coming off a bubbly moment in time, Grantham said.
“You can see how important it is that that 25% (liquidity sleeve) do pretty well in a bear market and ... it’s done okay,” he said.
On the grant-making side, meanwhile, the foundation allocates almost a third of the 4% to 5% of its corpus it distributes yearly to “commercialization — brilliant ideas in research which no one will yet touch commercially but that have real potential if they get lucky or good,” said Grantham. “Professional VC people ... have to be commercial. We do not ... so we are on both sides of the commercial line,” he said.
But if Grantham’s revamped foundation is in a better position now to make a difference, the clock is ticking and it’s difficult to feel overly sunny about the bigger picture, he said. “There’s a very good chance, sadly, that the world of our grandchildren will be a lot rougher and tougher and more difficult, particularly in some parts of the world, than we are used to in the last 80 to 90 years since World War II — a bit of a downer,” Grantham said.
And the odds of avoiding that outcome have been drifting down over the past decade, probably standing today at less than 50%, he said. Geopolitics are deteriorating, politics in most democracies are deteriorating and global trade is deteriorating while resources are becoming scarcer and more expensive, Grantham said.
But that outlook hasn’t extinguished all hope, he said. “We may get lucky. We may get unjustifiably lucky,” he said. “You know, what the hell, we’ll take it.”
