Head to head: PIMCO and GMO clash over ‘death of equities’
Famed equity investors respond to strong words on health of asset class by US bond powerhouse’s chief Bill Gross.
by Chris Sloley on Aug 15, 2012 at 10:32
US-based equity investors GMO has taken bond house PIMCO to task over comments made about the supposedly dire health of equities.
In a white paper entitled ‘Reports of the death of equities have been greatly exaggerated: explaining equity returns’, the investment firm, co-founded by Jeremy Grantham (pictured), set out to dispel what it perceived to be the major misconceptions regarding equity performance.
The document, penned by head of asset allocation Ben Inker, is seen as a direct response to a comment piece from PIMCO’s Bill Gross, in which the veteran bond investor slammed equities as an asset class.
In a typically outspoken piece, Gross claimed: 'The cult of equity is dying.'
'Several generations were weaned and in fact grew wealthier believing that pieces of paper representing “shares” of future profits were something more than a conditional IOU that came with risk.'
Although there is no overt mention to Gross, Inker does reference the phrase ‘death of equities’ on a number of occasions as part of his commentary.
‘Disappointing returns from equity markets over a period of time should not be viewed as a signal of the “death of equities”,’ he said.
‘Such losses are necessary for overpriced equity markets to revert to sustainable levels, and are therefore a necessary condition for the long-term return to equities to be stable.’
One key element Inker said investors need to understand is the relationship between equity returns and GDP growth – or, more specifically, the lack of one.
This is another point which Gross (pictured below) raised, as he said real GDP growth can constrain asset class performance.
Inker said: ‘Stock returns do not require a particular level of GDP growth, nor does a particular level of GDP growth imply anything about stock market returns. This has been true empirically, as the Dimson-Marsh-Staunton data from 1900-2000 shows.’
‘Many investors are utterly convinced that strong GDP growth is the primary reason why one country’s stock market will outperform another. This was certainly not the case in the 20th century,’
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