Dakota Office Productsgmo: the Value Versus Growth Dilemma
Abstract
The case GMO: The Value versus Growth Dilemma describes Dick Mayo’s puzzlement by the New Economy’s continuous bias toward growth-investment strategies. As one of the most celebrated value investors in the United States, he examines the basics of his philosophy versus that of a growth orientation by evaluating long-term expected returns of several value and growth stocks.
The following paper was examined to pursue several objectives: (1) to define value and growth investing – where the differences lie and whether one approach is superior to the other or whether both have merit; (2) to perform basic valuations of Cisco Systems (a growth company), CVS, R.R. Donnelly and Manor Care (value companies) and to compute their long-term expected returns; and (3) to discuss issues concerning the consistency of GMO’s investment philosophy even when the market seems to run counter to it for a prolonged period of time. In this respect we will also consider the issue if value investing can still deliver significance in this New Economy or if is it only an Old Economy concept and if we would invest in GMO.
Background
GMO was founded in 1977 by Dick Mayo, Jeremy Grantham and Kingsley Durant. From its beginning the company applied a fundamental bottoms-up approach to institutional investing, focusing on out-of-favor, sometimes unexciting domestic companies trading below intrinsic value (U.S. Active). Throughout the 1980s and early 1990s this strategy of identifying and investing in undervalued companies had paid off as U.S. Active had returned an average of 19.1% per year, 4.3% above the S&P 500 Index of large capitalization stocks (figure 1). Nevertheless, over the following years the firm broadened its scope to include international investing (International Active), and shortly thereafter, developed quantitative investment strategies. As of December 31, 1999, GMO managed in excess of $20 billion for almost 500 institutional clients, including educational
The case GMO: The Value versus Growth Dilemma describes Dick Mayo’s puzzlement by the New Economy’s continuous bias toward growth-investment strategies. As one of the most celebrated value investors in the United States, he examines the basics of his philosophy versus that of a growth orientation by evaluating long-term expected returns of several value and growth stocks.
The following paper was examined to pursue several objectives: (1) to define value and growth investing – where the differences lie and whether one approach is superior to the other or whether both have merit; (2) to perform basic valuations of Cisco Systems (a growth company), CVS, R.R. Donnelly and Manor Care (value companies) and to compute their long-term expected returns; and (3) to discuss issues concerning the consistency of GMO’s investment philosophy even when the market seems to run counter to it for a prolonged period of time. In this respect we will also consider the issue if value investing can still deliver significance in this New Economy or if is it only an Old Economy concept and if we would invest in GMO.
Background
GMO was founded in 1977 by Dick Mayo, Jeremy Grantham and Kingsley Durant. From its beginning the company applied a fundamental bottoms-up approach to institutional investing, focusing on out-of-favor, sometimes unexciting domestic companies trading below intrinsic value (U.S. Active). Throughout the 1980s and early 1990s this strategy of identifying and investing in undervalued companies had paid off as U.S. Active had returned an average of 19.1% per year, 4.3% above the S&P 500 Index of large capitalization stocks (figure 1). Nevertheless, over the following years the firm broadened its scope to include international investing (International Active), and shortly thereafter, developed quantitative investment strategies. As of December 31, 1999, GMO managed in excess of $20 billion for almost 500 institutional clients, including educational