Emerging Value and Margin of Superiority

GMO is a Boston asset manager co-founded in 1977 by Jeremy Grantham with Richard Mayo and Eyk Van Otterloo, known for valuation-driven dynamic asset allocation built on long-horizon mean reversion. Grantham is famous for calling historic bubbles, warning publicly ahead of both the 2000 dot-com crash and the 2008 financial crisis. Flagship publications include the GMO Quarterly Letter (now written by Asset Allocation co-heads Ben Inker and John Pease), Grantham's Viewpoints essays and the 7-Year Asset Class Forecast.

Jeremy Grantham · 1977 · 美国波士顿Valuation-driven / Multi-asset contrarian

Theme and Background

This chapter discusses GMO's rationale for increasing its holdings in emerging market equities in the first half of 2017, after they had risen by over 18%, going against the prevailing market trend. The market backdrop was a strong rebound in emerging markets, but GMO believed their relative value advantage had actually widened.

Core Thesis

GMO's core judgment was that, although the absolute expected return of emerging market value stocks had declined, their margin of superiority relative to other asset classes had increased. Therefore, under conditions of relatively benign risk, the institution chose to increase its allocation. This move differed from its typical contrarian strategy of "buying low and selling high," but based on relative value assessment, it remained a correct decision.

Key Arguments and Data

Market Performance: In the first half of 2017, emerging market equities rose by over 18%.
Expected Return Change: Since the beginning of the year, the absolute expected return of emerging market value stocks had declined.
Relative Value Assessment: The margin of superiority of emerging market value stocks relative to other assets had actually increased.
Risk Considerations: Emerging-specific risk was relatively benign, thus increasing GMO's willingness to assume that risk.

Indicator	Early 2017	Early July 2017 (at time of increase)
Cumulative gain in emerging market equities	—	Over 18%
Absolute expected return of emerging market value stocks	Higher	Declined
Relative superiority of emerging market value stocks	Baseline	Increased
Emerging-specific risk	—	Relatively benign

Companies/Assets Involved

Emerging Equities: GMO increased its holdings in this asset in early July 2017, taking a bullish stance.
Emerging Market Value Stocks: As a specific strategic direction, GMO believed their superiority over other assets (such as developed market equities and bonds) was greater.

Investment Implications

Contrarian moves must be based on relative value: GMO's case shows that even if an asset's price has risen significantly, if its valuation advantage relative to other assets has widened and risks are manageable, it can still be increased against the trend.
Focus on marginal changes, not absolute levels: Investors should pay attention to changes in relative value (margin of superiority) between asset classes, rather than solely looking at absolute returns or price trends.
Dynamic adjustment of risk tolerance: When specific risks (such as emerging market political or currency risks) are in a benign state, the allocation weight to that asset can be appropriately increased.