WHEB Commentary

Ted Franks

Resource scarcity challenges Grantham’s ‘impregnable faith in mean reversion’


In mid-March we were lucky enough to hear Jeremy Grantham speak in London. For those unfamiliar with his work, Grantham is something of a living legend in the investment community. He is the founder of GMO, a global asset management company which now has nearly $100bn under management. The success his investment skills brought him with GMO has allowed his foundation to sponsor two of the UK’s leading climate change research organizations: the Grantham Institute at Imperial College, and the Grantham Research Institute at the LSE.

One of the main strands of GMO’s investment approach, and something for which it became rightly famous, is the study of investment bubbles. Having looked at over 300 instances of speculative bubbles forming and then bursting, Grantham and GMO are unrivalled in the art of detecting when the price of a particular investment has overstretched itself and is due to come tumbling back down. And until about six years ago, every bubble they had ever studied had always done it. A bubble might last for years, but eventually it would have to burst. In Jeremy’s own words, he had ‘impregnable faith in mean reversion’, and had built a stellar investment reputation on the back of it.

So it was something of shock when, in 2007, this supreme cynic of any ‘new paradigm’ came out and said that rising oil prices weren’t in fact going to come back down. And it was even more interesting when he added that there were other commodity prices out there where the same thing was happening. An awful lot of commodity prices, as it happens. As he looked into the reasons for these simultaneous paradigm shifts, he came to some conclusions that environmentalists had been flagging for a while, starting right back with Thomas Malthus: that if you grow the human population exponentially, finite resources will eventually simply have to run out.

The significance of GMO’s work is in part derived from the fact that they weren’t thinking about sustainability when they started. They were just rigorously analyzing the data. GMO isn’t even a thematic investor: it is a mainstream, economics driven asset allocator (albeit a very, very good one). But thanks to Jeremy’s insight and clarity, and the quarterly newsletter he publishes (which is pretty much required reading in the investment community), his is now a very important voice in the global debate about resource usage and sustainability.

Needless to say, at WHEB we share the Grantham synopsis. Amongst many other astute asides, at Wednesday’s event Jeremy picked out resource efficiency as a ‘spectacular’ investment opportunity right now – which matches how our Fund is currently positioned.

You can find out about GMO at www.gmo.com; and the two research institutions at www.imperial.ac.uk/climatechange and www.lse.ac.uk/GranthamInstitute. To read in more detail about the paradigm shift, look for the GMO Quarterly Newsletters from April 2011 (‘Time to Wake Up: Days of Abundant Resources and Falling Prices are Over Forever’) and July 2011 (‘Resource Limitations 2: Separating the Dangerous from the Merely Serious’).

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