GMO Performance

GMO Performance#

Case: Grantham, Mayo, and Van Otterloo, 2012: Estimating the Equity Risk Premium [9-211-051].

1 READING: GMO#

This section is not graded, and you do not need to submit your answers. But you are expected to consider these issues and be ready to discuss them.

1. GMO’s approach.#

  • Why does GMO believe they can more easily predict long‑run than short‑run asset‑class performance?

  • What predicting variables does the case mention are used by GMO? Does this fit with the goal of long‑run forecasts?

  • How has this approach led to contrarian positions?

  • How does this approach raise business risk and managerial career risk?

2. The market environment.#

  • We often estimate the market risk premium by looking at a large sample of historic data. What reasons does the case give to be skeptical that the market risk premium will be as high in the future as it has been over the past 50 years?

  • In 2007, GMO forecasts real excess equity returns will be negative. What are the biggest drivers of their pessimistic conditional forecast relative to the unconditional forecast? (See Exhibit 9.)

  • In the 2011 forecast, what components has GMO revised most relative to 2007? Now how does their conditional forecast compare to the unconditional? (See Exhibit 10.)

3. Consider the asset‑class forecasts in Exhibit 1.#

  • Which asset class did GMO estimate to have a negative 10‑year return over 2002–2011?

  • Which asset classes substantially outperformed GMO’s estimate over that time period?

  • Which asset classes substantially underperformed GMO’s estimate over that time period?

4. Fund performance.#

  • In which asset class was GMWAX most heavily allocated throughout the majority of 1997–2011?

  • Comment on the performance of GMWAX versus its benchmark. (No calculation needed; simply comment on the comparison in the exhibits.)

2 Analyzing GMO’s Flagship Fund#

Data#

This section utilizes data in the file gmo_returns.xlsx.

  • gmo: total returns on two GMO funds

  • benchmarks: ETFs spanning the asset classes considered in the case

  • indexes: two indexes which are listed in the description of GMWAX

  • info: more info on the

Use SHV as the risk-free rate to calculate the excess returns.

import pandas as pd

filename = '../data/gmo_returns_weekly.xlsx'
TICK_RF = 'USGG3M'

# Load data
gmo = pd.read_excel(filename, sheet_name='gmo', index_col=0, parse_dates=True)
benchmarks = pd.read_excel(filename, sheet_name='benchmarks', index_col=0, parse_dates=True)
indexes = pd.read_excel(filename, sheet_name='indexes', index_col=0, parse_dates=True)
rates = pd.read_excel(filename, sheet_name='rates', index_col=0, parse_dates=True)
info = pd.read_excel(filename, sheet_name='info').set_index('Ticker')


if '_daily' in filename:
    ann_factor = 252
elif '_weekly' in filename:
    ann_factor = 52
elif '_monthly' in filename:
    ann_factor = 12
else:
    # Default to daily if no tag found
    ann_factor = 252

info.style.format({
    "Company Description": lambda x: (x if pd.isnull(x) else (x[:75] + '...' if len(x) > 100 else x)),
    info.columns[-2]: '${:,.0f}'.format,
    info.columns[-1]: '{:.2f}%'.format
}, na_rep='')
  Name Company Description Fund Total Assets Dividend Yield
Ticker        
GMWAX GMO Global Asset Allocation Fu GMO Global Asset Allocation Fund seeks total return greater than that of it... $466 4.24%
GBMFX GMO Benchmark-Free Allocation GMO Benchmark-Free Allocation Fund seeks a positive return by investing in ... $2,427 4.31%
GQETX GMO Quality Fund GMO Quality Fund seeks total return by investing in equities believed to be... $11,914 6.48%
GMGEX GMO Global Equity Allocation F GMO Global Equity Allocation Fund seeks a total return greater than its ben... $610 4.30%
SPY SPDR S&P 500 ETF Trust SPDR S&P 500 ETF Trust is an exchange-traded fund incorporated in the USA. ... $693,035 1.08%
EFA iShares MSCI EAFE ETF iShares MSCI EAFE ETF is an exchange-traded fund incorporated in the USA. T... $68,792 2.71%
IJR iShares Core S&P Small-Cap ETF iShares Core S&P Small-Cap ETF is an exchange-traded fund incorporated in t... $84,951 1.97%
GWX SPDR S&P International Small C SPDR S&P International Small Cap ETF is an exchange-traded fund incorporate... $774 2.22%
EEM iShares MSCI Emerging Markets iShares MSCI Emerging Markets ETF is an exchange-traded fund incorporated i... $20,902 2.14%
IYR iShares U.S. Real Estate ETF iShares U.S. Real Estate ETF is an exchange-traded fund incorporated in the... $3,805 2.39%
TLT iShares 20+ Year Treasury Bond iShares 20+ Year Treasury Bond ETF is an exchange-traded fund incorporated ... $50,014 4.34%
TIP iShares TIPS Bond ETF iShares TIPS ETF is an exchange-traded fund incorporated in the USA. The ET... $14,350 3.15%
BWX SPDR Bloomberg International T SPDR Bloomberg International Treasury Bond ETF is an exchange-traded fund i... $1,332 2.05%
EMB iShares J.P. Morgan USD Emergi iShares J.P. Morgan USD Emerging Markets Bond ETF is an exchange-traded fun... $15,087 5.31%
GLD SPDR Gold Shares SPDR Gold Shares is an investment fund incorporated in the USA. The invest... $141,430
DBC Invesco DB Commodity Index Tra Invesco DB Commodity Index Tracking Fund is an exchange traded fund incorpo... $1,298 4.84%
FXE Invesco CurrencyShares Euro Cu Invesco CurrencyShares Euro Trust is an exchange-traded fund incorporated i... $430 1.02%
MXWD MSCI ACWI Index The MSCI ACWI Index is a free-float weighted equity index. It was developed... 1.68%
LBUSTRUU Bloomberg US Agg Total Return The Bloomberg USAgg Index is a broad-based flagship benchmark that measures...
USGG3M US Generic Govt 3 Mth

1. Benchmarks#

Construct what we will call the GBI (GMWAX Benchmark Index). The GBI is constructed as (per detailed in the info tab)

  • 65% of MXWD

  • 35% of LBUSTRUU

Calculate excess returns of GMWAX, GBI and of SPY.

For all three, estimate the full-sample (annualized)

  • mean

  • vol

  • Sharpe

Also report

  • minimum return

  • 5th percentile

  • maximum drawdown

Also report the correlation matrix.

2. Attribution#

Estimate an attribution LFD of GMWAX on

  • SPY

  • GBI

That is, estimate a univariate regression for each.

Report the

  • alpha (annualized)

  • beta

  • r-squared

3. Interpretation#

What do you conclude about GMWAX relative performance?

  • Is it low-beta to the market?

  • Does it track the index?

  • Does GMWAX seem to earn alpha for its investors?

3. Other GMO Funds#

1.#

Report the correlation matrix of all GMO funds, along with SPY and the provided indexes.

Plot their cumulative returns.

2.#

Re-do the analysis of Section 2 for all GMO funds.

Footnote#

No need to compare to the GBI, as it is not provided as a benchmark for the others. You could benchmark GMGEX to MXWD, as it is listed as the primary benchmark. The others don’t list a benchmark.

3. Comparing the GMO Funds#

How similar are the GMO funds?

Which do you think is the most attractive investment product?

4. GMO Across Subsamples#

1. Subsamples#

For all the GMO funds as well as SPY, calculate the Sharpe ratio for the following subsamples.

  • start to 2011

  • 2012 to end

Do we see outperformance in GMO funds across either subsumple? Both?

2. Subsample Info Ratios#

For all the GMO funds calculate the Info ratio relative to SPY for the following subsamples.

  • start to 2011

  • 2012 to end

Do we see outperformance in GMO funds across either subsumple? Both?

3.#

Compare the cumulative returns from 2001 to 2010 of

  • the GMO funds

  • SPY

  • Treasuries via TLT

  • the risk-free rate for the time period

Is the GMO case correct that equities underperformed this period?

Observations

  • Yes, we see SPY and the two equity-focused GMO strategies underperform the risk-free rate!

  • Additionally, they vastly underperform Treasury bonds (TLT).

  • The multi-asset GMO funds shine in this period, as seen in GMWAX and GBMFX.

This would be even more pronounced if we started in the year 2000.

5. Factor Exposures#

1.#

Estimate a LFD of GMWAX on the following…

  • SPY

  • EFA

  • EEM

  • TLT

  • TIP

(GMO case considers additional benchmarks such as foreign bonds, small stocks, etc. They don’t add much to this analysis.)

Report the

  • alpha

  • beta

  • r-squared

2.#

How well do these factors explain GMWAX?

Is there evidence of outperformance?

3.#

Try the multivariate regression on GBMFX, the largest GMO fund.

4.#

Consider either GMWAX or GBMFX for the the next subsections.

Estimate the LFD betas on a rolling basis.

  • use a window of 2 years.

Make a bar chart of the betas at the final point in time.

5.#

Plot the exposures and discuss how the strategy has changed over time.

6. Forecasts#

1.#

In July 2015, GMO forecasted the following as 7-year annualized mean real returns.

Footnote:#

Their forecasts specify classes and benchmarks. Here, we map those to specific ETFs not specified by GMO. Additionally, we do not track every forecast made.

forecasts = pd.DataFrame({
    'SPY': -2.0,
    'EFA': -0.5,
    'EEM': -3.2,
    'TLT': -0.9,
    'TIP': 0,
    'IJR': -2,
    'GWX': -1.1,
    'EMB': 2.1,
    'BWX': -2.8
},index=['forecast']).T

forecasts /= 100
forecasts.style.format('{:.1%}',na_rep='')
  forecast
SPY -2.0%
EFA -0.5%
EEM -3.2%
TLT -0.9%
TIP 0.0%
IJR -2.0%
GWX -1.1%
EMB 2.1%
BWX -2.8%

Use the benchmarks data to calculate the realized 7-year nominal excess return on these assets. You have ETF proxies for most of the categories, and ignore those for which you do not.

Note#

Using nominal excess instead of real total should not greatly impact the analysis.

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