The Value vs. Growth Dilemma: GMO Case Study
BUFN763 Case 2 GMO
Choi, Saunders & Yoo
Nov 11, 2014
Case 2: GMO: The Value versus Growth Dilemma, UVA-F-1328
1. What is value investing? What is its rationale? What are GMO’s main arguments in favor of value investing?
Value investing is the art of selecting equities that are currently trading at a lower price than their underlying value, but seem likely at some future time be recognized more widely by traders as having been undervalued. Thus, for example, stocks that are trading at a low P/E ratio relative to similar stocks can be examined for their underlying fundamental ability to recover and perform more like their peers. Value investing involves examining fundamental company metrics and management practices to determine if the reason for lower value is justified or will be corrected. If the company seems likely to correct the underlying issues, it becomes a good target for value investing.
GMO has identified a method of long term market outperformance by consistently identifying companies that are sound and will outperform the market, all things being equal. GMO’s investors are counting on this strategy to provide performance in the long term above the market overall. Value stocks represent companies that are likely to be around in the long term, likely to outperform the market average and will exhibit lower volatility in the long term compared to growth companies.
These characteristics are likely to be valued by GMO’s institutional investors.
2. What are the differences between value and growth investing? What are their relative merits?
Value investing is focused on finding good companies that are mature, but have been undervalued by the market for reasons that are likely to be corrected, while growth investing tends to focus on
‘picking winners’ e.g. identifying companies that may come to dominate a market or create new markets. Value investing tends to outperform the broad market most of the time. The underlying equities tend to be established
Choi, Saunders & Yoo
Nov 11, 2014
Case 2: GMO: The Value versus Growth Dilemma, UVA-F-1328
1. What is value investing? What is its rationale? What are GMO’s main arguments in favor of value investing?
Value investing is the art of selecting equities that are currently trading at a lower price than their underlying value, but seem likely at some future time be recognized more widely by traders as having been undervalued. Thus, for example, stocks that are trading at a low P/E ratio relative to similar stocks can be examined for their underlying fundamental ability to recover and perform more like their peers. Value investing involves examining fundamental company metrics and management practices to determine if the reason for lower value is justified or will be corrected. If the company seems likely to correct the underlying issues, it becomes a good target for value investing.
GMO has identified a method of long term market outperformance by consistently identifying companies that are sound and will outperform the market, all things being equal. GMO’s investors are counting on this strategy to provide performance in the long term above the market overall. Value stocks represent companies that are likely to be around in the long term, likely to outperform the market average and will exhibit lower volatility in the long term compared to growth companies.
These characteristics are likely to be valued by GMO’s institutional investors.
2. What are the differences between value and growth investing? What are their relative merits?
Value investing is focused on finding good companies that are mature, but have been undervalued by the market for reasons that are likely to be corrected, while growth investing tends to focus on
‘picking winners’ e.g. identifying companies that may come to dominate a market or create new markets. Value investing tends to outperform the broad market most of the time. The underlying equities tend to be established