Ben Inker on Value and Asset Allocation (Podcast)

Episode Summary

Executive Summary: Ben Inker of GMO argues that markets are in a speculative bubble driven by extreme valuations, especially in U.S. growth/tech stocks, while value and many non-U.S. markets look more attractive. He explains GMO’s long-term forecasting, critiques price-to-book as outdated due to intangibles and buybacks, and highlights Japan and select emerging markets as opportunities.

Main Topics: Market cycle, bubbles, and valuation discipline: Inker says markets can stay irrational for long periods, but valuation and cash flows eventually reassert themselves. He sees current conditions as bubble-like, though the exact trigger and timing of any reversal remain uncertain. GMO’s long-term return forecasting framework: He explains GMO’s seven-year forecasts, which assume a return to 'normal' valuations and profitability, with a newer scenario that allows for permanently lower interest rates ('partial mean reversion'). Why value has underperformed: Value’s recent underperformance is traced mainly to valuation expansion in growth stocks rather than an abandonment of value fundamentals. Inker argues the valuation spread has become unsustainably wide. Intangibles, accounting flaws, and the limits of price-to-book: Inker says price-to-book is increasingly misleading because modern corporate investment is heavily intangible (R&D, software, IP) and buybacks can erase book value. GMO adjusts accounting to better reflect economic reality. Non-U.S. opportunities: Japan and emerging markets: He views developed ex-U.S. equities as cheaper than the U.S., with Japan especially interesting due to low valuations and potential profitability improvement. In emerging markets, he emphasizes country-specific opportunities like Russia. Mega-cap tech and speculative excess: He distinguishes extraordinary businesses like Alphabet and Apple from stocks priced at extreme multiples. He argues many high-growth names are far too expensive and that large tech’s future growth will slow as their scale matures. ESG, climate, and engagement: GMO integrates environmental and governance risks into models and is expanding corporate engagement, especially in Japan, to encourage better governance and sustainability outcomes.

Key Arguments: Valuation still matters for most financial assets because long-run returns converge to cash flows and normalized pricing. The current market looks bubble-like, but the precise catalyst for a turn is often unclear or only visible in hindsight. GMO’s seven-year forecasts are built on a mean-reversion framework; the firm now tests both a traditional equilibrium and a lower-rate 'partial mean reversion' world. U.S. equities remain expensive even under a low-rate scenario, while many non-U.S. markets look more reasonable. Value’s underperformance since 2007 is driven mainly by expanding relative valuations against it, not simply by poor business fundamentals. Price-to-book is structurally broken because intangible investment is expensed rather than capitalized and buybacks reduce book value. Japan offers a potential earnings and profitability rerating if companies improve capital allocation, payouts, and governance. Emerging markets should be analyzed country by country because risks are idiosyncratic; cheapness often reflects real problems, but those problems can improve. Mega-cap tech companies can remain great businesses without sustaining prior growth rates, and their valuations are now much less attractive than in the past. Climate and governance considerations matter economically, but GMO still thinks in terms of fair price and investment return, not screening alone.

Data Points: GMO assets under management: about $60 billion - Firm size discussed early in the interview Aggressive long-short strategy return: 80% cumulative net return - GMO strategy during the dot-com implosion Inker tenure at GMO: since 1992 - He described his career path at the firm U.S. stock forecast horizon: 7 years - GMO’s published forecast window Value underperformance period: since about 2007 - He described the duration of value’s slump Value underperformance in 2020: worst single year for value relative to growth in history - He cited 2020 as the most extreme year Value’s long-run growth deficit: about 5 points a year - From 1981 to 2006, value stocks undergrew the market by roughly this amount Value’s long-run outperformance: about 2.5 points a year - Value outperformed the market in the 1981-2006 period Relative valuation gap: about 70% wider than average over the last 40 years - Value vs. growth valuation spread Largest U.S. companies share of S&P 500: about 25% - The six largest companies now make up this portion of the index Apple valuation change: 13x earnings to approximately 39x earnings - He noted the rise in Apple’s valuation over several years Russell 2000 behavior: outperformed in 2020 - Despite worse fundamentals, small caps rallied late in the year March 2000 intraday market move: down 12-14% in the morning, ending down about 1-2% - He recalled the volatility as a possible early crack in the internet bubble 2028 example for speculative pricing: 80x forecast earnings - QuantumScape mentioned as an example of extreme valuation Emerging markets country count: 30-odd countries - He emphasized diversification across many EM markets

Pivotal Quotes: "the market in the short term may be a voting machine, but in the long term is a weighing machine" — Ben Inker: Used to explain why valuation ultimately dominates long-run returns "we used to call that scenario hell. We now call it partial mean reversion" — Ben Inker: Describing GMO’s lower-rate valuation scenario in its forecasting model "the value half of the market has underperformed the overall market by about a point and a half a year" — Ben Inker: Summarizing the magnitude of value’s recent underperformance

Implications: Listeners should expect continued volatility and possible regime shifts: GMO sees expensive U.S. growth, attractive value, and better opportunities abroad. The episode also warns that accounting, valuation, and governance are increasingly central to investing.