Mar 30, 2020 · 1h 24m · capital-allocators
Ben Inker – Value Investing at GMO (First Meeting, EP.17)
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In this episode of Capital Allocators, host Ted Seides interviews GMO's Head of Asset Allocation Ben Inker to explore the mathematical foundation of value investing, the adaptation of quantitative models in an intangible economy, and the behavioral discipline required for institutional portfolio construction. Inker shares formative lessons from legendary mentors and provides strategic frameworks for navigating market dislocations, corporate monopolies, and allocator cognitive biases.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 16.2% of the talking time here. How this is scored →
Ted as informed peer 5.5 Guest teaching 5.2 Guest disagreement 2.2 Ted pushing back 1.2
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 1:01:00 Ben dismantles the illiquidity premium in private equity
Ben forcefully dismisses the common allocator assumption that taking a public company private and re-listing it automatically earns an illiquidity premium.
Hardest push from Ted ▶ 35:34 Ted pushes back with Tepper's monopoly concentration argumentTed directly challenges Ben's thesis on mean-reverting margins by citing industry concentration and regulatory moats as structural reasons for persistent tech dominance.
Biggest teaching moment ▶ 45:30 Ben debunks productivity growth assumptions with manufacturing dataBen provides a detailed empirical breakdown revealing that US manufacturing productivity growth has been net negative since 2011, overturning standard economic narratives.
Ted holds their own ▶ 35:34 Ted frames the natural monopoly and profit margin problemTed demonstrates deep macroeconomic knowledge by synthesizing industrial concentration literature into a sharp, multi-layered question on tech margins.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Formative Yale Mentors: Lessons from Shiller and Tobin | 4 | 5 | 1 | 0 | Ted prompts Ben on his academic background at Yale with Shiller and Tobin. Ben explains key conceptual lessons on market volatility and replacement costs in an educational manner. | |
| David Swenson Mentorship and Getting Hired at GMO | 3 | 4 | 1 | 0 | Ben narrates his humorous origin story involving David Swensen and how Jeremy Grantham reluctantly hired him straight out of undergraduate studies. Ted listens and facilitates the narrative. | |
| GMO Investment Philosophy: Relentlessly Probing Why and How | 5 | 4 | 2 | 1 | Ted probes into GMO's philosophical core and how Ben found his footing. Ben stresses the discipline of relentlessly asking why and how rather than blindly running models. | |
| Synergy Between Quantitative Frameworks and Fundamental Research | 6 | 4 | 2 | 2 | Ted compares the current market regime to the late 1990s tech bubble. Ben details the complementary nature of quantitative and fundamental research and explains differences in client sentiment. | |
| The Value Thesis and Global Valuation Spreads Today | 6 | 5 | 2 | 1 | Ted asks why investors will get paid for owning value today. Ben deconstructs the limits of giant tech growth like Google and highlights wider valuation spreads outside the US. | |
| Sponsor Announcement: Ridgeline Investment Management Technology Platform | 7 | 5 | 3 | 3 | Ted cites Jonathan Tepper's thesis on industry concentration to challenge whether profit margins will stay permanently elevated. Ben agrees secular concentration exists but argues antitrust policy will eventually reverse it. | |
| Accounting for Intangibles and Evaluating Returns to Scale | 5 | 5 | 2 | 1 | Ted asks how GMO accounts for technological disruption and intangible assets. Ben explains the adjustment of accounting metrics and critiques the SoftBank Vision Fund approach of trying to buy market dominance. | |
| Interest Rates, Equity Duration, and the Productivity Paradox | 6 | 7 | 3 | 1 | Ben reframes the consensus view on interest rates and equity duration, demonstrating that lower rates may imply lower returns on capital rather than long-duration advantages for growth stocks, backed by negative manufacturing productivity data. | |
| Why Quantitative Capital Has Fled the Value Factor | 6 | 5 | 2 | 2 | Ted asks why quantitative capital hasn't arbitraged away wide value spreads. Ben explains how backward-looking backtests cause quants and capital flows to abandon underperforming factors. | |
| M&A Dynamics and the Disappearing Value Takeover Premium | 6 | 5 | 2 | 2 | Ted pushes Ben on whether business realities have fundamentally broken value factor assumptions. Ben analyzes empirical takeover data and shows private equity shifted from cheap value targets to growth targets. | |
| Allocator Pitfalls and Debunking the Illiquidity Premium Myth | 6 | 8 | 4 | 1 | Ben aggressively debunks the institutional concept of an illiquidity premium in private equity LBOs, showing that making an asset temporarily private and taking it public again does not inherently generate a fundamental liquidity premium. | |
| Institutional Portfolio Construction and Long-Term Time Horizon | 6 | 5 | 2 | 1 | Ted asks how an institutional allocator should structure a portfolio today. Ben details the necessity of aligning risk capacity with institutional mission and long time horizons. | |
| Crisis Update: COVID-19 Market Shock and Opportunity | 5 | 6 | 3 | 1 | In a COVID-19 shock follow-up and closing questions, Ben outlines the anatomy of bear markets and sharply critiques allocators who misuse terminology and extrapolate backward-looking bond returns. |
Statements from this episode (23)
Inker: Stock market volatility of 17% vastly exceeds fair value's 1%
“There is very, very little volatility to the underlying fair value. It's about one percent a year. And yet the market has a volatility of 17. And that's a mismatch that says there must be some predictability to the market”
Inker: Replacement cost, not historical cost, should drive asset pricing
“The way to have a simple way of determining, is this a fair price or not? It doesn't matter what you paid. It doesn't matter what you will pay tomorrow. It is, what is the replacement cost of this thing? And the replacement cost should drive price.”
Inker: Quants excel at backtesting but miss structural regime changes
“The great strength of quantitative investing is if you have a theory about how the world should work, you can vary You can efficiently express that across kind of a wide view of assets. You can test it across a long run of history. The danger you always face i…”
Inker: Stated Earnings and Book Value Are Poor Metrics for Business Models
“When we are analyzing these companies, we realize it's not just that we don't care about their book value anymore, but even their stated earnings turn out to be a lousy test of whether this is a good business model.”
Inker: Pre-2020 value investing drought mirrors the 1994-1999 era
“2000 to 2002 was a wonderful period for value. The similarity to the 1994 to 1999 period is this has been another dreadful period for value as a strategy. We see that kind of on a individual stock level. It's also been a lousy period for valuation driven inves…”
Inker: Client banned GMO in 1999 for Grantham's 'persuasive' views
“In 1999, we were disinvited from speaking to their investment committee on the grounds that their committee chairman said that Jeremy Grantham was both dangerously persuasive and totally wrong.”
Inker: Allocators lack 1990s-level disgust for value investing
“We don't see that level of disgust with the idea of value today that we did back then.”
Inker: Google cannot outgrow GDP forever without a new business model
“Google has been able to grow extraordinarily fast by taking share from every other kind of advertising that has happened.
The underlying fundamental truth that advertising grows with GDP has not changed, and as their share of advertising gets bigger and bigger…”
Inker: US Value Spread Suggests Value Stocks Will Win Over 5-10 Years
“Again, in the US, the value spread is significantly wider than normal, and that probably means value deserves to win over the next five to 10 years.”
Inker: Valuation spreads in Europe and Japan lack underlying economic justification
“But if you look at Europe, if you look at Japan, if you look at the emerging worlds, the spreads are both wider, and the underlying economic justification for them is a lot more tenuous.”
Inker: Profitability gap between mega-caps and peers widened most in US
“There is no question the gap between the biggest companies and everybody else in their industries, the gap in profitability has widened very significantly, and that widening has been much more pronounced in the U.S. Than it has been elsewhere.”
Inker: GMO wrongly forecasted mega-cap margin mean reversion on cyclical timeframe
“But one of the things I think we got wrong in our forecast was we said implicitly that that unwinding is going to occur in the same kind of timeframe as cyclical fluctuations in earnings.”
Inker: SoftBank's Vision Fund proved capital alone cannot buy market dominance
“I think one of the things we have seen in the, in some of the trials of what's gone on with the Vision Fund is this basic idea that, well, we can determine who is going to be the winner here by throwing a ton of money at one of the competitors. And assuming th…”
Inker: Equities are longer duration than perpetual bonds due to cash flow growth
“Equities are in principle an exceptionally long duration asset. Relative to bonds, they are both a perpetuity, so there is no maturity date, and that makes them long duration. But also, they're even longer duration than a perpetual bond because their cash flow…”
Inker: US manufacturing productivity has been net negative since 2011
“Productivity growth has been net negative. We are less productive making stuff than we were in 2011.”
Inker: Value historically beats market by 1% despite 3% earnings undergrowth
“Historically, they traded at a 25% discount, and they undergrew by three percent a year, and it turns out that a 25% discount and three percent a year undergrowth allows you to outperform by a point a year.”
Inker: 12-year value drought causes standard quant backtests to penalize value
“If you are a quant, your favorite tool is the back test. And it has now been 12 years that value has underperformed. You are much less likely to come up with a quantitative stock selection technique that is predominantly value, because if you look back, you sa…”
Inker: Low Rates Enabled PE and Tech Giants to Buy Growth
“Given how low rates have been, and indeed how tight credit spreads have been, private equity firms have had an enhanced ability to buy growth companies and take them private. We've also had a world where, frankly, the big dominant companies have bought a lot o…”
Inker: Assuming an automatic illiquidity premium across private equity is dangerous
“This assumption that you get paid an illiquidity premium for anything that happens to be illiquid is I think dangerous. I think it is going to cause you not to be focused on the question of, all right, if I think this is about operational excellence, why do I …”
Inker: Over 80% of polled endowment allocators believe they beat the average
“One of the obnoxious questions we asked Ask the audience is, how many of you think you are better than average at finding active managers? The surprising thing was, I think, 18% of the audience said they did not think they were better than average.”
Inker: Long-term equity value loss requires either lower ROIC or shareholder dilution
“The two ways you can lose value in equities from a long-term perspective Is if an event causes a long-term decrease in the return on capital, or if an event causes you as a shareholder to be significantly diluted.”
Inker: Historical crises dilute diversified equity portfolios by at most 5%
“Historically, apart from events of, frankly, revolution and regime change, we haven't seen profoundly dilutive events. We've seen things where you got diluted A few percent, maybe as much as five percent.”
Inker: Bear markets progress across three distinct phases of quality and valuation
“In the first stage of bear markets, everything tends to go down the same, and if anything helps, it's quality. In the second phase, valuation tends to matter. That doesn't mean value stocks always outperform in the second phase. It is the stuff that has gotten…”