GMO: The value vs. growth dilemma Harvard Case Solution & Analysis

GMO: The value vs. growth dilemma Case Solution

Introduction

 Grant ham Mayo, Van Otterloo & Co. Limited Liability Company (GMO) was established in 1977. Dick Mayo was the founder of GMO along with Jeremy Grant ham, Van Otter loo and Kingsley Duran. Dick Mayo has the value investing philosophy and has applied such investing policy from the inception of the organization. The company targeted the companies that are being traded at a value much lower than its intrinsic value. These companies are extensively studied by the research team and the investment is made if the company is confirmed to have the potential of gaining higher value at some point in time in the future. The strategy was proved successful and it over-performed the S&P 500 index during 1990s. U.S Actives, companies trading at value less than its intrinsic value, had yielded return about 4.3% above the S&P 500 index. The company grew rapidly and soon entered the international investment market. The clients include some small financial institutions, endowment and pension funds (educational and corporate) and other private organizations and individuals.

One of the company retail mutual funds, Pelican fund that was managed by Mayo is considered as top 5% funds out of all funds. This fund was yielding 19.7% five year return. Although the investors are more investing based on the growth investment strategy, however the returns from value investment were high. During 1998, the Active U.S strategy outperformed S&P index by 2% on annual basis. The current market trend is to make investments based on growth investment strategy, which is opposite of Mayo’s value investment strategy. Moreover, issues started to rise which placed questions on the effectiveness of Mayo’s strategy in the current market conditions and for future as well.

Problem Statement

Since the inception of the company, Dick Mayo had the investment philosophy that is based on the value investment. However, based on the current market and economic conditions, he is in a critical position to think and address the issues that are expected to be raised by the investors based on the investment strategy. The trend is the investment to be made based on the growth strategy, and factors such as earnings and price appreciation are becoming the basis for the decision of the investors to invest or not.

The core issues are that how Mayo justifies that the value investment strategy is still dominant in the current economic situation. This also involves satisfying the concerns of the investors, the benefits that this investment approach will bear on their investment and when will these benefits will be utilized and in what manner. All these problems should be solved so that the current philosophical investment strategy of the company shall prevail.

Investing strategies involved in the case

There are two investment strategies involved in the case namely value investment and growth investment. Value investment is one of the oldest but successful techniques used for investment. Based on the information and results, it is certain that this is an effective strategy which out-performed the S&P index many times in the past. Growth investment strategy is also an old investment strategy however,it became popular in the late 1990s. Dick Mayo’s investment philosophy is also based on the value investment.Through this strategy of value investment, he enabled the company to achieve high returns on its funds. These two strategies are further discussed with their some attributes and disadvantages below.

Value investment

Value investment can be defined as the investment made in the stock that are undervalued in the market due to some factors or if the market has inaccurately analyzed its potential. The intrinsic value of the stock is misrepresented in the current market valuation. Thus, the investor purchases such undervalued shares with a perception to gain high return when the market identifies the correct value of the company. The investor avails such opportunity and invests in such stocks...................

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