GMO’s quarterly performance update for the fourth quarter ended December 31, 2015.
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GMO Benchmark-Free Allocation Strategy
Performance data quoted represents past performance and is not predictive of future performance. Returns are shown after the deduction of management fees, transaction costs and other expenses, but before custody charges, withholding taxes, and other indirect expenses. The returns assume the reinvestment of dividends and other income.
The chart above shows the past performance of the GMO Benchmark?Free Allocation Composite (the “Composite”). Prior to January 1, 2012, the accounts in the Composite served as the principal component of a broader real return strategy. Beginning January 1, 2012, accounts in the composite have been managed as a standalone investment.
The CPI (Consumer Price Index) for All Urban Consumers U.S. All Items is published monthly by the U.S. government as an indicator of changes in price levels (or inflation) paid by urban consumers for a representative basket of goods and services.
GMO – Equity
Characteristics: Global equities rallied during the quarter, making an already expensive asset class even less attractive. We continue to concentrate our allocations in the most compelling areas including: emerging markets value and select opportunistic holdings; international value primarily across Europe and Japan; and U.S. opportunistic value and high quality positions.
Positioning: At the end of the fourth quarter, equities represented approximately 43% of the portfolio. While our overall equity and regional targets remained unchanged during the quarter, position weights changed modestly due primarily to market movements. U.S. equity exposures increased while non-U.S. developed and emerging equity exposures stayed constant through the quarter.
Results: Equities accounted for the majority of the positive portfolio returns during the quarter. Our allocation to U.S. equities was the largest contributor to equity returns as both U.S. quality and U.S. opportunistic value holdings rallied strongly. Information Technology and Consumer Discretionary names drove performance. While the emerging market index was near flat in USD terms, strong stock selection, particularly in our China Internet holdings, enabled our emerging equity positions to deliver meaningful returns. Strong stock selection in U.S., European value, and Japan holdings positively contributed, but weakness in our other international opportunistic value positions (principally Valeant) more than offset those gains.
GMO – Alternative Strategies
Characteristics: We remain underwhelmed by the opportunities available across equity markets and look for other ways to get paid for taking risk. Alternative strategies represent diversifying ways to generate returns.
Positioning: At the end of the fourth quarter, alternative strategies represented approximately 1996 of the portfolio. Alternative strategies are comprised of relative value interest rates and FX, merger arbitrage, Systematic Global Macro, and Special Opportunity. Our weight in alternatives decreased a modest 1% as we continued to exit some extraneous relative value interest rates and FX positions. Other alternative position sizes remained relatively constant during the quarter.
Results: During the quarter, alternative strategies contributed modestly to portfolio returns, rising 2.2%. Relative value interest rates and FX rose as our FX positions (short Euro and Swiss franc) contributed more than interest rate strategies (long Australia in particular) detracted. Merger arbitrage increased due largely to spreads narrowing on a number of large strategic deals. Systematic Global Macro declined modestly as bond (long U.S. treasuries, shortJGBs) and currency positions detracted more than equity (short Canada, long Europe) contributed. Special Opportunity rose as key equity holdings rallied.
GMO – Fixed Income
Characteristics: The fixed income portfolio is comprised principally of rates and credit positions. Rates globally remain low, leaving few opportunities for traditional duration exposures. Low inflation expectations implied by TIPS breakeven rates seem to offer an asymmetric opportunity. Spreads in some credit assets look attractive, but underlying duration exposures and concerns about potentially rising default rates limit our enthusiasm.
Positioning: The overall exposure to our fixed income allocation increased to approximately 27% during the quarter. We added 4% to our TIPS position (approximately 15% at quarter end) and another 1% to distressed credit names. In credit, we hold Emerging Country Debt, asset-backed securities, and a select number of distressed credit opportunities.
Results: The fixed income allocation had a minimal impact on portfolio performance. TIPS declined as underlying treasury yields rose, offsetting a modest rise in inflation breakeven rates. Emerging Country Debt increased as spreads narrowed in general and Argentina and Venezuela bonds rallied on election results in both countries and default avoidance in the latter. Positions in asset-backed securities were essentially flat, while distressed credit holdings posted strong returns as risk markets in general rallied.
GMO – Cash/Cash Plus
Characteristics: Cash/cash plus consists of U.S. T-bills and other high quality short duration government and agency securities.
Positioning: The portfolio’s cash/cash plus allocation decreased 7% during the quarter to approximately 1 1%. Although we continue to have conviction in the Alpha Only Strategy, we eliminated our exposure to it in favor of the liquidity and dry powder characteristics of cash.
Results: The allocation to cash/cash plus had minimal impact on portfolio returns.
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