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Quarterly Update
GMO International Equity Inception 3Q YTD YTD Value One Five Ten Since
Strategies/Benchmarks Date 2010 2010 Added Year Year Year Inception
International Active EAFE 5/31/81 16.26 -0.37 -1.44 1.77 1.58 5.82 12.63
MSCI EAFE 16.48 1.07 3.27 1.97 2.56 9.28
Int'l. Active Foreign Small Companies 1/31/95 17.75 12.24 2.80 14.64 6.89 12.51 11.82
S&P Developed ex-U.S. Small Cap 17.40 9.45 9.85 4.24 7.48 6.95
International Intrinsic Value 3/31/87 15.79 1.38 3.32 0.99 0.97 6.76 8.27
MSCI EAFE Value 16.36 -1.94 -1.67 1.09 3.87 7.12
MSCI EAFE 16.48 1.07 3.27 1.97 2.56 5.08
International Growth 11/30/01 16.85 5.16 1.08 9.47 3.09 n/a 7.33
MSCI EAFE Growth 16.59 4.08 8.41 2.78 n/a 5.55
MSCI EAFE 16.48 1.07 3.27 1.97 n/a 6.15
International Core Equity 1/31/02 16.47 2.72 1.65 3.64 1.63 n/a 8.38
MSCI EAFE 16.48 1.07 3.27 1.97 n/a 6.87
Currency Hedged Int'l. Equity 6/30/95 7.75 2.21 2.32 4.91 0.78 3.99 7.42
MSCI EAFE (Hedged) 7.50 -0.12 2.81 0.40 -0.35 5.69
Japan Equity 12/31/05 3.10 5.70 2.12 -0.50 n/a n/a -4.33
MSCI Japan IMI++ 5.45 3.58 -0.17 n/a n/a -4.50
Int'l. Small Companies 10/31/91 17.64 6.79 -2.37 4.78 3.79 11.08 9.35
MSCI EAFE Small Cap + 17.51 9.16 8.04 4.71 7.73 6.57
MSCI EAFE 16.48 1.07 3.27 1.97 2.56 5.21
Tax-Managed Int'l. Equities 8/31/98 16.11 2.05 0.99 3.19 2.18 7.32 7.74
MSCI EAFE 16.48 1.07 3.27 1.97 2.56 4.42
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. A GIPS® compliant presentation is available at www.gmo.com.
Copyright © 2010 by GMO. All rights reserved. This document may not be reproduced, distributed or transmitted, in whole or in portion, by any
means, without written permission from GMO.
GMO Quarterly Update 3
GMO Global Equity Inception 3Q YTD YTD Value One Five Ten Since
Strategies/Benchmarks Date 2010 2010 Added Year Year Year Inception
Global Active Equity 8/31/00 13.92 1.88 -0.70 5.11 1.69 7.78 7.98
MSCI World 13.78 2.58 6.76 1.30 0.79 0.24
Global Equity 7/31/96 14.33 2.90 0.32 6.82 0.62 3.84 6.68
MSCI World 13.78 2.58 6.76 1.30 0.79 4.93
Global Growth 7/31/04 15.70 4.39 0.38 10.31 2.24 n/a 5.42
MSCI World Growth 14.81 4.01 10.22 2.17 n/a 4.86
MSCI World 13.78 2.58 6.76 1.30 n/a 4.32
GMO Fixed Income Inception 3Q YTD YTD Value One Five Ten Since
Strategies/Benchmarks Date 2010 2010 Added Year Year Year Inception
Core Plus Bond 4/30/97 4.31 13.78 5.84 16.68 3.65 5.86 6.01
Barclays Capital U.S. Aggregate 2.48 7.94 8.16 6.20 6.41 6.53
Inflation Indexed Plus Bond 5/31/06 4.61 13.37 6.37 18.58 n/a n/a 4.03
Barclays Capital U.S. Treasury Inflation Notes 2.48 7.00 8.89 n/a n/a 6.84
U.S. Treasury 3/31/09 0.01 0.06 -0.03 0.13 n/a n/a 0.22
Citigroup 3 Mo. T-Bill 0.04 0.09 0.12 n/a n/a 0.14
International Bond 12/31/93 12.41 15.33 7.08 15.48 5.83 8.10 7.61
J.P. Morgan Non-U.S. Gov't. Bond 10.37 8.25 5.91 7.71 8.23 6.67
Currency Hedged Int'l. Bond 9/30/94 4.29 14.23 7.20 16.36 3.07 5.38 8.30
J.P. Morgan Non-U.S. Gov't. 2.66 7.03 6.97 4.94 5.62 7.44
Bond (Hedged) (ex-Japan) +
Global Bond* 12/31/95 9.90 15.22 6.87 16.46 5.18 7.22 6.35
J.P. Morgan Global Gov't. Bond 7.95 8.35 6.28 7.32 7.79 6.12
Emerging Country Debt* 4/30/94 12.31 23.06 8.91 28.39 8.70 14.33 16.97
J.P. Morgan EMBI Global + 8.33 14.14 15.88 9.17 10.70 12.28
Emerging Country Local Debt Investment** 2/29/08 13.61 16.62 2.66 23.10 n/a n/a 4.81
J.P. Morgan GBI-EM Diversified 12.45 13.96 17.26 n/a n/a 9.67
Asset Allocation Bond 3/31/09 1.83 4.48 4.38 7.16 n/a n/a 7.33
Citigroup 3 Mo. T-Bill 0.04 0.09 0.12 n/a n/a 0.14
* Returns for one of the accounts in the composite are based on estimated market values for the period from and including October 2008 through February 2009.
** Returns for the composite are based on estimated market values for the period from and including October 2008 through February 2009.
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. A GIPS® compliant presentation is available at www.gmo.com.
4 GMO Quarterly Update
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. A GIPS® compliant presentation is available at www.gmo.com.
GMO Quarterly Update 5
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. A GIPS® compliant presentation is available at www.gmo.com.
6 GMO Quarterly Update
Global Market Review a reduction in the trade deficit. Hardly the signs of a
healthy recovery, normally driven by increases in the
First there were green shoots and, in short order, three Cs: construction, consumption, and confidence.
a fully blooming V-shaped recovery. It has been over a High and persistent unemployment was similarly
year since the chairman of the Federal Reserve employed dismissed in the face of ever-rising corporate profits. But
his horticultural metaphor and economists began to now that the fiscal stimulus has begun to fade and the
speculate about the shape of the recovery. In the interim, variety of programs designed to reach into the future and
asset prices have substantially recovered, the real pull demand into the present have ended, the underlying
economy has stabilized, and even the recession dating weaknesses are once again exposed. Without the artificial
committee at the NBER called June 2009 as the trough support, second quarter GDP was revised down from
of the recession. Given our belief that mean reversion 2.4% to 1.7%.
drives almost everything, we suppose it is only to be
expected that by the time the third quarter of 2010 rolled Investors responded to the renewed uncertainty with
around, the pendulum has swung all the way back to talk characteristic poise, as sentiment swung from hysteria to
of another recession. Just as night follows day, recovery apoplexy before settling on Panglossian exuberance. The
has been supplanted by relapse. The warning signs were one area where this was most apparent was the sovereign
there from the beginning. After all, GDP growth had bond market. Having pushed yields lower in the
been almost entirely made up of an inventory rebuild and previous quarter, investors continued to welcome
the warm embrace of what appears on the surface to be
Global Balanced Asset Allocation: One Example the one remaining safe asset. The move in yields even
Recommendations as of September 30, 2010 provoked suggestions that the bond market was entering
Benchmark: 65% MSCI AC World Index /
35% Barclays Capital Aggregate a bubble. While it is hard to see how an asset class with
an almost infallible cash flow stream such as a
Benchmark GMO Active
government bond can be subject to an irrational bubble,
U.S. Weighting Decisions
Equities it does seem almost certain that bond investors will have
Fixed
27.2%
Income to make do with very low real returns if they insist on
35.0%
paying such high prices. Other signs of stress included
U.S.
Equities
-2.2%
persistently high correlations and volatilities across most
Emerging
risky asset classes, together with low bond yields, all
International
Equities Equities traditional markers of a market meltdown. And yet,
8.9% 28.9%
Int'l. August notwithstanding, equities managed to reverse all
Equities
-3.4% of the second quarter losses and then some. In the
GMO Allocation twisted logic of the bulls, the worse things are, the more
Cash & monetary authorities stand ready to come to the rescue,
Special Equivalents
Situations
4.7%
2.8% Quality
25.0%
Emerging
offering greater and greater amounts of liquidity. Zero
interest rates not enough? Start increasing the central
Alpha Only
Equities
12.7%
Asset +3.2%
International
Allocation Bond
4.4%
Intrinsic Value
4.2%
bank’s balance sheet. Quantitative easing not having the
Emerging
Country Debt
International
Growth
desired effect? Simply increase asset purchases until it
0.5%
does. Although running the printing presses may well
4.3%
Inflation
International
Indexed Plus
1.1%
Strategic
Core Equity
15.7%
Fixed
Income
put a floor under the equity market for a while, it seems
Flexible
+2.4%
inconceivable that currency debasement and beggar-thy-
Fixed Income
Domestic Equities
7.5% Emerging
Bond 1.3%
Markets
-10% -5% 0% 5% 10% aggregate demand. A weakening dollar may well borrow
growth from the rest of the world in the short term, but
Note: Asset Allocation ranges are ±20% for U.S. and
international equities and ±15% for fixed income. it’s unlikely to solve the problem of too much debt of all
types.
GMO Quarterly Update 7
After taking a serious tumble in August, equities came Faced with still lower interest rates, investors
roaring back in September as it became increasingly clear continued to look for yield wherever they could find it.
that the Federal Reserve had no intention of sitting by as Although the Barclays Capital U.S. Aggregate gained a
the economy drifted toward a double dip. The S&P 500 modest 2.5%, investors seemed to have just discovered
rocketed up 11.3% for the quarter, pushing the index the higher yields in emerging market bonds, and the J.P.
back into the green for the year. Interestingly, while Morgan EMBI Global raced ahead, returning +8.3% for
value, small cap, and junk equities have led in previous the quarter.
rallies, this time around the pattern was significantly
different. Growth stocks had a nearly three-point lead on Asset Allocation
value stocks as the Russell 1000 Value index was up only
10.1% versus the Russell Growth’s +13.0% return. Review
Unusually for such a strong move, small capitalization
stocks actually had the same return as the large caps, with Recoveries from financial recessions are never easy or
the Russell 2000 index gaining 11.3%. quick. The financial architecture that usually enables the
interest-rate-sensitive sectors of the economy to jump-
Developed markets outside the U.S. also rallied in start aggregate demand remains gummed up. Without a
sympathy, despite lingering concerns around sovereign well-functioning and healthy credit system, real estate and
debt levels in the European periphery. A crumbling capital investment along with consumer durables remain
dollar meant that the EAFE index was up an impressive anemic and the real economy struggles to grow. The
16.5% while in local terms the same index did not even acute phase of the financial crisis saw the full Keynesian
manage to return half that, rising only 7.1%. Both value apparatus wheeled out to combat a free-falling real
and growth indices were up similar amounts, with the economy. But while stimulus can support liquidity, it is
EAFE Value index gaining 16.4% and the EAFE Growth not much use in the face of insolvency. The real
index increasing 16.6%. Emerging market equities were economy cannot escape the pain generated by a hobbled
the stand-outs once again, with a total return for the banking sector trying to rebuild its balance sheet. On the
quarter for the S&P/IFCI Composite of +18.3%. The other hand, asset markets, at least in the short run,
performance of emerging equities will no doubt further invariably shear their fundamental moorings. Equities, in
solidify the idea that emerging countries will continue to particular, are especially prone to short-, medium-, and
outpace the developed world. long-term cycles of fear and greed. This time has been
no different and, while the secular outlook for the global
The yield on 10-year U.S. Treasuries had already fallen economy has remained broadly unchanged, equity
to below 3% by the end of the second quarter on flight to markets have swung between mild depression and
safety flows. During the third quarter, yields continued outright elation.
their precipitous drop and fell almost another 44 basis
points to 2.5%. The U.S. was certainly not alone, and all Rather than favor any particular macro theme, our
major sovereign bond markets saw their yields plunge. In portfolios have always relied on valuation to determine
Switzerland, the 10-year yield even traded below 1% how, where, and when we are positioned. Over the last
briefly. Falling sovereign yields in the U.S. meant that the few quarters this has been a humbling experience more
J.P. Morgan U.S. Government Bond index returned a often than not. While the market has chosen to favor
respectable +2.8%, while the J.P. Morgan non-US risky smaller companies with volatile profits and stock
Government Bond index managed an eye-popping prices, we have remained unwavering in our penchant for
+10.4%, helped in large part by the weak dollar. high quality. Although we did take advantage of the
second quarter European turmoil to tactically redeploy a
8 GMO Quarterly Update
few points of our high quality exposure toward course, real headwinds for the markets. But they are, in
international developed and emerging market equities, the end, shorter term in nature. Longer term, the slower-
our broad portfolio positioning is remarkably the same. burn worries would include the moral hazard of a market
Unlike previous quarters, however, where every lurch that now anticipates, indeed, depends upon, intervention
higher in equity prices left quality in the dust, high quality and all of its nasty cousins. The huffing and puffing of
for once was able to hold its ground in a strong quarter central governments around the planet is certainly having
for equities overall. Could it be that the market is waking some short-term beneficial effects, but at what cost?
up to high quality’s fundamental cheapness? We won’t And at what point will their efforts appear winded?
know for some time, but for now we can at least take
some solace in the results for quality this quarter. Our broad strategies are:
Strategies
Continue bias towards high quality stocks. While
historically, high quality stocks – those companies
“I’ll huff and I’ll puff, and I’ll blow your house … and
exhibiting high, consistent ROE and low debt – have
stock … and bond prices higher.” The expectation of
traded at a significant premium to the market,
further quantitative easing breathed life into the markets
valuations today are cheap. Quality stocks represent
this quarter, leading to the “reflation” of virtually all risky
one of the few areas within the U.S. equity market that
assets globally. September’s stock rally was the best
is trading below its fair value, and the portfolio’s U.S.
September since 1939 as the Fed all but signaled that
exposure will continue to tilt toward quality. While we
further intervention was a near certainty, with the
will admit frustration that the markets have not been
markets simply to debate what precisely would be on the
interested in discerning quality from junk, there are
shopping list. U.S. Treasuries continued their rally, with
increasing drumbeats among respected opinion
yields on the 2-year notes ending the quarter at 0.41%,
formers that quality companies may indeed be some
and corporations have been re-financing their debt at a
of the few bargains left in an otherwise inflated
furious pace with investors shockingly eager to buy up
market. And while we take no joy in our thesis not
paltry yields.
holding up over the last year or so, we welcome the
fact that other important voices have been joining the
In our opinion, all this huffing and puffing is simply
quality chorus of late.
making expensive assets even more so. U.S. stocks, we
believe, are still trading significantly above their fair value,
especially small caps. And bond yields are at 60-year
Maintain exposure to emerging markets. We are
lows. Can yields go lower? Clearly, as we found out this overweight emerging markets within global equity
quarter. Yet to load up on bonds at this stage strikes us mandates as they represent a sub-asset class trading
as folly. We simply want to avoid that inevitable day of near or even below their fair value. Despite the more
reckoning when investors who are essentially being narrow concern about a possible “bubble” in an
prodded by the Fed to reach for yield (either through overheated Chinese real estate market, we remain
taking credit or duration risk) will be burned. While not positive on the asset class. Strangely, emerging
overtly, I guess you could say that we’ve been fighting the countries, long perceived as the more unstable and
Fed. profligate economies, are literally emerging from the
global financial crisis as beacons of growth, stability,
The wall of worry still stands tall – a fragile and tepid and prosperity. This, combined with the more secular
economic recovery, high and seemingly more entrenched phenomenon of a growing middle class, continues to
unemployment, moribund housing prices, prospects of bode well.
global currency debasement, the echo of widening credit
worries from the periphery of Europe – these are all, of
GMO Quarterly Update 9
Inflation not a worry … for now. While there is a 11.3% for the period, clawing its way back into positive
powerful argument to be made that the extreme territory for the year in full. Statements and expectations
indebtedness of the U.S. government (and sovereign about future action by the Federal Reserve lifted investor
nations, more generally), the sheer volume of spirits during the period. The Fed’s promise to intervene
economic stimulus, and the growth of the money if economic conditions worsened was viewed by
supply and subsequent debasement of fiat currencies investors as a promising protection against the prospect
pose a potent (but latent) inflation threat, in the of a double-dip recession.
shorter term inflation will likely remain at bay. Still,
timing the eventual escape of the inflation genie is a U.S. Equity Markets
terrifically difficult game, so we don’t play it. Instead, Third Quarter 2010 Performance
15%
we will continue to position our bond portfolio 13.0% 13.1% 13.2%
defensively by simply buying the cheapest of an 11.7% 11.4%
11.3%
expensive opportunity set, albeit begrudgingly. This 10.1%
means continued emphasis on shorter- and 10%
Hold cash and cash “plus” as dry powder. It is 0%
S&P Dow Russell 1000 Russell 2500 MSCI
admittedly distasteful to be owning any cash or fixed 500 Jones Value Growth Value Growth U.S.
income at these levels. But if you believe, as we do, U.S. TSM REIT
that they offer some degree of “optionality” – that is,
they act as dry powder in the event we find more
favorable pricing of assets in the future – then one can While a palatable resolution to the European
make sense of it. sovereign debt crisis sent stocks higher during the
quarter, investment factor spreads were narrow. There
was little difference between the relative returns of high
Where possible, invest in conservative absolute
and low quality stocks, as both groups lagged a rising
return strategies, which can provide equity-like
market. High quality’s modest underperformance in a
returns while improving diversification through low
rising market is of particular note. The group
correlations with equity markets. Try to ensure that
experienced an unexpectedly poor second quarter, as
alternative strategies are providing true diversification
worries about U.S. high quality multinationals’ European
with low correlation to traditional asset classes.
exposure trumped their defensive business characteristics
in investors’ minds. With markets rising in the third
Performance Review and Outlook quarter, investors might have expected another poor
U.S. Equities performance – a “heads I win, tails you lose” scenario –
Market Review as buyers who avoided quality in the second quarter
market decline due to its “risky” exposure to Europe now
U.S. investors shook off their European sovereign found it insufficiently risky in a rising market. Notably,
debt hangover in the third quarter. After the favored this was not the case. While high quality stocks
recipe of government intervention quelled investor fear underperformed during the quarter, it was by a modest
that European troubles could spill into the global margin in comparison with past flights to risk. Quality’s
economy, U.S. stocks bounced back strongly from their second and third quarter experience highlights both the
second quarter losses. The S&P 500 posted a gain of folly of over-emphasizing short periods of relative return
10 GMO Quarterly Update
U.S. Equities
Relative Performance of Selected Groups versus the S&P 500
Year-to-Date September 30, 2010
Largest 100 Russell 2500
1.0 8.0
0.5
6.0
0.0
4.0
Size
-0.5
-1.0 2.0
-1.5
0.0
-2.0
-2.5 -2.0
12/09 3/10 6/10 9/10 12/09 3/10 6/10 9/10
Investment Disciplines
2.0
1.0
3.0
0.0
-1.0
0.0
-2.0
-3.0
-4.0 -3.0
12/09 3/10 6/10 9/10 12/09 3/10 6/10 9/10
10.0
8.0
5.0
6.0
4.0
0.0
2.0
0.0
Sectors
-2.0 -5.0
12/09 3/10 6/10 9/10 12/09 3/10 6/10 9/10
-2.0 16.0
12.0
-4.0 8.0
4.0
-6.0 0.0
-4.0
-8.0 -8.0
12/09 3/10 6/10 9/10 12/09 3/10 6/10 9/10
GMO Quarterly Update 11
and the importance of a value-based philosophy, where hand. In the long run, investment returns have three
short-term underperformance merely serves as an sources: dividends, fundamental growth, and changes in
opportunity to buy more of a good thing at an even price multiple. Simple does not mean easy. There are
better price. Keeping on the value theme, bottom-up innumerable factors that influence a company’s ability to
valuation metrics (i.e., models that seek undervalued pay dividends and grow, and the multiple the market is
individual stocks) also exhibited tight spreads during the willing to pay for it. But at the heart of a value
period, delivering mixed relative returns that, for most investment philosophy is an understanding of what is
metrics, were neither extremely bad nor extremely good. knowable, what is unknowable, the risks to both the
Simple measures of “value” like price/book and price/ known and the unknown, and where we derive an edge.
earnings were strong participants in the 2009 market rally, Doing simple things well is a big enough task without
owing to their heavy exposure to the more beaten-down, layering on an urge to parse the latest economic data to
cyclical areas of the market. But their 2010 performance fit a macro theory, distorting any edge we might have
has reflected a less extreme environment than the rapid obtained. Our focus remains on understanding the
rotations between greed and fear that marked the 2008- knowable, acknowledging the unknown, weighing the
09 period. Finally, momentum metrics posted similarly associated risks, and finding investments trading for less
modest relative returns for the period, though for the than they’re worth. We’ll leave prognostications to the
most part they outperformed. Momentum’s “calming- prognosticators. After all, it’s a crowded field.
down” is another notable comparison to the greed-fear
pendulum of 2008-09 where momentum metrics were
International Equities
alternately woeful (caught holding heavy commodities
Market Review
exposure as the market began to unwind in 2008), heroic
(rotating into defensive positioning in the depths of the
International Equity Markets
crisis), and even more woeful (getting heavily defensive Third Quarter 2010 Performance
just as the market turned in March of 2009). While 30%
For the entire quarter, the MSCI EAFE index The largest positive individual impact for the quarter
returned +16.5% in U.S. dollars terms. A good chunk of came from BP, as news flow was reasonably positive and
the return was due to foreign currency appreciation as the investors’ attention proved fairly short. Mining
index returned +7.1% measured in local currencies. The companies like Rio Tinto and Xstrata were also
dollar fell to its lowest level on a trade-weighted basis in contributors, and Europe banks like Lloyds, BNP
September on the back of Federal Reserve Bank Paribas, and Société Générale appeared high on the list.
comments about battling deflationary pressures. The
euro was one of the strongest currencies, but the yen Outlook
reached its highest level against the dollar since 1995,
prompting the Japanese government to intervene in A big story of the last few years has been high
September. correlations as stocks move together, up or down,
depending on investor sentiment to take on risk. This
The MSCI Europe index returned +19.4% for the should provide stock picking opportunities as
quarter, while MSCI Japan was up a more muted 5.8%. fundamentals are less correlated than market movement.
All EAFE markets appreciated with the exception of Measured in conventional ways, however, value spreads
Ireland, which was hurt by credit rating downgrades. are fairly tight, and the overall valuation of markets is not
Japan and Switzerland were the only two markets to post especially enticing. At this point, the best opportunities
gains of under 15% in dollar terms, while the best are likely found by picking out the good that has been
performers – Norway, Spain, and Austria – approached punished with the bad over the last few years, identifying
30% gains. stocks and countries where true value exists, and where
the quality of the business is strong enough to not force
Sector performance was similarly broad based. one to make a call on the macro economy for an
Energy, Materials, and Telecommunications posted the investment to turn out to be prudent.
highest performance. Technology was the only sector to
post merely single-digit returns within EAFE markets, Emerging Market Equities
while Health Care, Utilities, and Consumer Staples
Market Review
lagged, reflecting a preference for cyclicals over
defensives in general. Financials were nestled sedately in The third quarter began and ended on an upbeat note,
the middle of the pack for this quarter after several years August being the sole bearish month. Investors have
of being an extreme performer on one side or the other. gained greater confidence in the prospects of a global
Japanese and German financials underperformed, but economic recovery. In particular, they have been
elsewhere in Europe the sector held up well. attracted by the prospects of high growth in emerging
markets, which is a marked contrast to the outlook for
The quarter was not clearly a period of risky assets developed markets. The asset class jumped to its highest
outperforming, however. The EAFE Small Cap index level since the credit crisis, supported by a surge of
returned +17.5% to just barely edge out its large cap inflows.
cousin, and the Emerging Market index didn’t pull too far
away, registering an 18.0% gain. The EAFE Value and Chile’s economy grew 6.5% in the second quarter
Growth indices provided nearly identical returns of from a year ago, the biggest rise in five years. National
+16.4% and +16.6%, respectively. On GMO’s quality economic output is approaching levels before the
measure (blending high profitability, stable profitability, February earthquake, which caused an estimated $30
GMO Quarterly Update 13
billion in damage. Consumption has jumped following focus on the brightening economic picture. Gross
the quake, with retail sales growing strongly. Chile’s domestic product rose 9.1% in the second quarter after
central bank has raised rates by 2 percentage points in having jumped 12% in the three months to March, the
four months. The rate increase, along with the strength best two quarters of growth since 1995. The central bank
of the domestic economy and continuing robust prices raised its benchmark interest rate and signaled further
for copper, the country’s main export, has sent the increases as the economy continues to grow faster than
Chilean peso on a bull run. expected. The central bank expects the economy to
expand as much as 7.5% this year, a pace that would be
Manufacturing accelerated in China for a second the highest in several years.
straight month in September, adding to signs that the
fastest-growing major global economy is stabilizing. Turkey’s ruling party won a referendum, widely
China’s growth has helped pull in imports from around viewed as an indicator of the general elections next year,
the world, assisting in the global recovery. In the face of by a larger than expected margin. Investors cheered the
rising pressure from property value appreciation in China, increased odds of a continuation of Prime Minister
the central bank has avoided raising interest rates and Erdogan’s policies, which have helped deliver
instead has attempted to micromanage the real estate record economic growth. The referendum included
issues. It has asked banks to dampen credit growth, amendments that bring Turkey’s military further under
raised their reserve ratios, and issued a series of guidelines civilian control. It will also restructure the judiciary,
that tighten requirements on mortgages, especially for giving the government more control over appointments
multiple home purchases. Economic growth fell to to various courts. The vote has been welcomed by both
10.3% last quarter from an annual pace of 11.9% in the the country’s leading business group and the European
prior three months. Union. Turkey’s economy grew at an annual rate of
more than 10% in the first two quarters.
The Indian stock market was hit by fears of tightening
monetary policy. The central bank raised a benchmark Outlook
rate and pledged to review borrowing costs at meetings
every six weeks, rather than once a quarter. Accelerating In this outlook we cover some notable country
growth is running against capacities in power, roads, and developments that we feel could be key drivers in the
ports. Foreign funds desirous of participating in the coming months.
strong pace of economic growth have pumped in a
cumulative 891.2 billion rupees ($19.8 billion) in 2010. Philippines President Benigno Aquino plans to boost
India’s gross domestic product expanded 8.8% last the country’s credit rating and lure foreign investors by
quarter from a year earlier, the highest among major shrinking its record budget deficit. The government,
economies in Asia after China. Investors have bid up which has pledged to avoid raising taxes, is instead
valuations on expectations that the growth will continue considering changes in cigarette and alcohol levies and
and on optimism that its domestic demand is relatively stepping up prosecution of tax evaders. Markets have
insulated from the issues impacting global economic been receptive to Aquino’s proposals to cut the deficit
growth. and boost the economy, including a plan to offer
investors $16.7 billion of infrastructure projects. In
Thailand’s stock market has been one of the best addition, the economy is currently benefiting from some
performers this quarter despite a political stand-off. The tailwinds. Boosted by exports and remittances, it grew
two sides disagree on how much authority appointed 7.9% last quarter, the fastest pace in three years. The
soldiers, judges, and royal advisers should wield over central bank has also kept rates at a record low of 4% as
elected politicians. Ignoring politics, investors chose to inflation continues to be mild. After several years of
14 GMO Quarterly Update
lagging other emerging Asia markets, the Philippines Prime Minister Viktor Orban’s party swept the local
could enjoy a growth spurt if the reform plans actually elections held in early October in Hungary. The party
get implemented. already enjoyed a clear majority in parliament and now
does not have to face an election until 2014. Orban came
Mexico sold $1 billion of 100-year bonds, the longest- to power earlier this year after promising to end the
maturity debt issued by a Latin American country. The ongoing austerity programs and spur economic growth.
International Monetary Fund forecasts Mexico’s Hungary was one of the hardest-hit emerging markets
economy will expand 4.5% this year. Contrary to the during the crisis because of its foreign currency debt.
barrage of headlines on drug-related gang violence, the About 80% of Hungarian mortgage loans are
economy is doing well. The government has taken denominated in Swiss francs as households thought it
significant steps to introduce more competition in key was an easy way to circumvent the high interest rates in
sectors of the economy. The 16-year-old North their own currency. Orban has announced significant
American Free Trade Agreement continues to be a key taxes on banks and cutbacks in public services. But, the
driver. Gross domestic product expanded 7.6% in the party has also made news for battling the central bank
second quarter, boosted by U.S. demand for everything and for pushing back against the IMF on budget-deficit
from refrigerators to cars. Mexico’s exports to the U.S. targets. Rating agencies have not taken this well – S&P
have gained market share from China as companies took lowered the outlook on Hungary’s BBB- rating to
advantage of the lower shipping costs from a border negative in July. However, in September the Cabinet did
country. It is too soon to make firm pronouncements, commit to a deficit of no more than 3% of gross
but it would be interesting if the haze of drug violence is domestic product in 2011. And the market, which has
masking a genuine transformation in Mexico. generally been punishing Hungary during each bout of
risk aversion, has chosen to view the latest election
When Lula da Silva, the current Brazilian president, outcomes optimistically. They are betting that the
was campaigning in 2002, markets were hypersensitive to government will have the flexibility to make hard
candidate pronouncements and Lula’s eventual victory decisions on the next budget, due by the end of October.
depressed values significantly. After nearly eight years in Given the uncertainty in the market, clarity can certainly
office, Lula has record popularity ratings. The economy help prices. However, the events of the last few months
clocked a rate of more than 8.8% in the first half of the suggest a non-trivial possibility that investors might not
year, and unemployment fell to 6.7% in August. GDP per like the details that will emerge in the next few weeks.
capita has jumped to $8,217 in 2009 from $2,870 in 2002.
Dilma Rousseff, Lula’s designated successor, finished
Fixed Income
first in the initial round of elections and will face her
main rival, Jose Serra, in a run-off later in October. In Review
these elections, the bulls have barely broken their stride
to examine the differences between Rousseff and Serra. Global government bond markets were strong and
Rousseff has pledged continuity with her mentor’s the dollar weak in the third quarter. Bond yields began
policies that, in addition to generating a strong pace of their decline amidst the August equity market wobble,
economic growth, have also caused the federal and then accelerated lower in anticipation of “QE2” by
government’s spending to rise as a percent of the the U.S. Federal Reserve. The global hunt for yield
economy, resulting in a deficit of 3.4%. Serra, on the ensured that bond yields from emerging countries
other hand, has been more critical of government followed suit, and the gap between the two narrowed
spending growing faster than the pace of economic during the quarter.
growth. Time will tell whether the markets have
sharpened their foresight in the eight years since 2002.
GMO Quarterly Update 15
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16 GMO Quarterly Update
across the region, with 2%+ gains in Korea, Thailand, In local emerging currency bond markets, higher-
Singapore, Philippines, Malaysia, India, and Taiwan. In yielding Brazil, Colombia, and South Africa led the
Latin America, the big winner was Chilean peso, +12.8%, markets, with returns of 10.1%, 8.6%, and 7.9%,
which followed the upward trajectory of copper prices. respectively. The index’s newest entrant, Chile, was the
only market to see a decline, falling 1%.
Government bond markets rallied in the third quarter,
particularly when most world equity markets declined EMBIG’s sovereign spread tightened by 54 basis
sharply mid-quarter. In local currency bond index terms, points to 305 basis points during the period, and the bid-
gains were the highest in the U.K., +3.7%, and the lowest offer spread on the index tightened as well. Among the
in Switzerland, +0.9%. The +1.9% index total return for biggest index gainers for the quarter were Argentina,
the euro area masked a wide range of outcomes among Belize, and the Philippines. Argentina reaped the
euro currency participants, only the largest of which benefits of its successful exchange of defaulted bonds,
(Germany, Italy, France, Spain, Netherlands, and the boom in soybeans, and global risk appetite. Tiny
Belgium) pertain. Core euro zone debt markets, Belize’s $550 million of restructured bonds have also
including France and Germany, rose during the quarter, gained from the strong market tone, returning +65% in
by 2% to 3%. Meanwhile, Spanish bonds rose by 4.3%, the first nine months of the year. In the Philippines, the
and Greek bonds rose by 4.0%, outperforming core euro new Aquino administration was able to convince the
zone debt markets. Irish bonds, however, provided the market that it would use its political capital to implement
euro zone’s worst returns, falling by 4.3% during the serious fiscal reform.
quarter. Ireland’s debt crisis is the latest to rattle Europe,
with officials attempting to stave off an emergency Among the lowest performers of the quarter were
bailout by promising to pump billions into its banks that Ecuador, Pakistan, and Tunisia. The lone Ecuadorean
were hardest-hit. Outside of the euro zone, U.S. 2015 bond dropped 11% on the last day of the quarter
(+2.8%), Canadian (+2.7%), Swedish (+1.3%), Japanese when disgruntled police officers took the president
(+1.1%), and Australian (+1.1%) bond markets reported hostage in a dispute over pay and benefits. Pakistan was
gains during the month. devastated by flooding that covered almost 20% of the
country’s territory, and the government’s weak response
disappointed foreigners and locals alike. Tunisian bonds
have a short duration and did not benefit as much from
falling rates as others.
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GMO Quarterly Update 17
11.3 11.9
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Though they continue to post welcomed gains, pools
Strategies once used for cash collateral were not the main
contributors for the quarter.
Currency positioning was a stand-out contributor
across fixed income strategies, both in developed and
especially emerging markets. In the latter, overweight Outlook
positions across Central Eastern Europe, the Middle
East, and Africa (CEEMEA) and much of Asia were With so many policy uncertainties lurking, it’s hard to
particularly helpful. In developed, overweights in the give a clear outlook these days. Perhaps the clearest, if
Australian dollar, yen, Norwegian krone, and New perhaps not the most original, observation is summed up
Zealand dollar were all positive contributors. in the chart below: emerging debt yields far exceed the
paltry returns to deposits, and look increasingly tempting
In emerging debt, external debt strategies had a relative to the ever-declining yields on developed
fantastic quarter thanks to asset class tightening as well as markets’ government bonds. Hence, the “wall of
positive contributions from both country selection and money” that fund-tracking firms report in detailing
security selection, the latter of which continued to be record inflows into emerging debt. Further evidence was
aided by the former collateral pool performances. In provided by the near record turnout for the emerging
emerging local debt, security selection drove strategy market investor program at this year’s IMF/World Bank
gains, followed by contributions from the former meetings.
collateral pool. The local strategy’s zero weight in
Thailand, whose bonds and currencies jumped despite Global Bond Yields
14%
lingering political issues, weighed heavily on
performance. Although other non-Japan Asia currency 12%
EMBIG (External Debt)
positions offset the loss due to the Thai baht 10%
underweight, other country positions failed to offset the GBI-EMD (Local Debt)
8%
loss on the bond side.
6%
Disclaimer: The views expressed herein are through the period ending September 30, 2010, and are subject to change at any time based on market and
other conditions. This is not an offer or solicitation for the purchase or sale of any security, is not intended to be investment advice and should not
be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be
interpreted as, recommendations to purchase or sell such securities.
GMO Quarterly Update 19
Sector selection detracted from relative returns for the quarter. The strategy saw positive returns relative to the benchmark attributable
to underweight position in Financials. Underweight positions in Materials and Telecommunication Services and an overweight in
Health Care were among the detractors.
Stock selection added to relative returns. Selections in Information Technology, Health Care, and Financials added to returns versus
the benchmark while picks in Consumer Staples and Industrials detracted. Individual stocks adding to relative returns in the third
quarter included overweight positions in Pfizer, Oracle, and QUALCOMM. Stock selections detracting from returns versus the
benchmark included overweight positions in Procter & Gamble, Medtronic, and Microsoft.
1 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.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities.
3 The S&P 500 Index is a well-known, independently maintained and published U.S. large capitalization stock index.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
20 GMO Quarterly Update
Sector selection added to relative returns for the quarter. The strategy’s underweight in Financials and overweight positions in Energy
and Information Technology added to relative returns. Underweight positions in Utilities and Telecommunication Services detracted
from returns versus the benchmark.
Stock selection also added to relative returns. Selections in Information Technology, Financials, and Consumer Staples added to
returns versus the benchmark while picks in Energy detracted. Individual names adding to relative returns included overweight
positions in Oracle, UnitedHealth Group, and Pfizer. Stock selections detracting from relative returns included overweight positions
in McKesson and Medtronic and not owning Anadarko Petroleum.
1 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.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities.
3 The Russell 1000 Value Index is an independently maintained and published index which measures the performance of those stocks included in the Russell 1000 Index
with lower price-to-book ratios and lower forecasted growth values.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
GMO Quarterly Update 21
Sector selection detracted from relative returns. An underweight in Energy added to relative returns while underweight positions in
Materials and Industrials and an overweight in Health Care were among the detractors.
Stock selection also detracted from relative returns for the quarter. Selections in Consumer Discretionary and Information Technology
added to returns versus the benchmark while picks in Consumer Staples, Industrials, and Health Care detracted. Individual stocks
adding to returns included overweight positions in QUALCOMM, Oracle, and Apollo Group. Selections detracting from relative
returns included overweight positions in Procter & Gamble, Johnson & Johnson, and Hewlett-Packard.
1 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.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities.
3 The Russell 1000 Growth Index is an independently maintained and published index which measures the performance of those stocks included in the Russell 1000 Index
with higher price-to-book ratios and higher forecasted growth values.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
GMO Quarterly Update 23
Sector selection added to returns relative to the benchmark. An overweight in Consumer Discretionary and underweight positions in
Financials and Telecommunication Services added to relative returns while an overweight in Health Care and underweight positions in
Utilities and Energy detracted.
Stock selection also added to relative returns for the quarter. Selections in Information Technology, Consumer Discretionary, and
Industrials added to returns versus the benchmark while picks in Health Care detracted. Individual stocks adding to relative returns
included overweight positions in Fossil, TRW Automotive Holdings, and NBTY. Individual names detracting from relative
returns included overweight positions in Lincare Holdings, Amedisys, and Sketchers USA.
1 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.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities.
3 The Russell 2500 Value + Index is comprised of the Russell 2500 Index from 12/31/1991 to 12/31/1996 and the Russell 2500 Value Index thereafter. The Russell 2500
Value Index is an independently maintained and published index which measures the performance of those stocks included in the Russell 2500 Index with lower price-to-
book ratios and lower forecasted growth values.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
24 GMO Quarterly Update
Sector selection had little impact on returns versus the benchmark. An overweight in Consumer Discretionary added to relative
returns while an underweight in Information Technology and an overweight in Health Care detracted.
Stock selection added to relative returns for the quarter. Selections in Consumer Discretionary, Industrials, and Materials added to
relative returns while picks in Health Care detracted. Individual stocks adding to relative returns included overweight positions in F5
Networks, NBTY, and Wyndham Worldwide. Individual names detracting from relative performance included overweight positions in
Lincare Holdings, Cree, and Perrigo.
1 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.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities.
3 The Russell 2500 Growth Index is an independently maintained and published index which measures the performance of those stocks included in the Russell 2500 Index
with higher price-to-book ratios and higher forecasted growth values.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
GMO Quarterly Update 25
Sector selection had no impact on returns relative to the MSCI U.S. REIT index. An overweight in the Retail GICS Sub-Industry was
the leading position adding to returns versus the benchmark while an underweight in the Industrial GICS Sub-Industry was the leading
detractor.
Stock selection was also flat. Selections in the GICS Office, Retail, and Diversified sub-industries added to relative returns while picks
in Specialized and Residential detracted. In terms of individual names, an overweight in Simon Property Group and underweight
positions in Duke Realty and Corporate Office Properties Trust added to relative returns. Overweight positions in Host Hotels &
Resorts, Winthrop Realty Trust, and Sunstone Hotel Investors were the leading detractors.
1 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.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities.
3 The MSCI U.S. REIT Index is a well-known, independently maintained and published index of equity securities issued by REITs.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
26 GMO Quarterly Update
Within the portfolio, the three stock selection strategies all realized moderate positive relative performance for the quarter. Both the
intrinsic value and high quality strategy benefited from common themes – underweight exposure to Financial Services stocks, and
positive performance within Information Technology. The momentum-based strategy found a more broad-based path to success,
across and within multiple sectors.
Looking at some of the portfolio’s largest active positions, overweight exposure to Google, Oracle, Pfizer and United Health all
contributed positively. Microsoft and Exxon Mobil, also overweight selections, detracted from performance.
1 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.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities.
3 Market conditions, tax legislation and government regulations may limit the Strategy’s ability to utilize tax efficient strategies. After-tax returns are calculated using the
historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax
situation and may differ from those shown. After-tax returns are not relevant to investors who hold investment through a tax-deferred arrangement.
4 The Strategy’s benchmark is the Russell 3000 + Index (after tax), computed by the Manager by adjusting the return of the Russell 3000 + Index. The Manager estimates
the Russell 3000 + Index’s after-tax return by applying the maximum historical applicable individual federal tax rate to the Russell 3000 + Index’s dividend yield. The
Russell 3000 + Index is comprised of the S&P 500 Index from 7/23/98 to 10/15/07, and the Russell 3000 Index thereafter.
5 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
6 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
GMO Quarterly Update 27
Country selection was 0.8% behind the benchmark. An underweight position in Australia subtracted 0.4% from returns, and an
underweight position in Sweden subtracted another 0.2%. The largest positive impact from country selection came from an
underweight position in Japan, which added 0.3% to performance. The strategy’s currency hedge against the euro was closed in
August.
Stock selection beat the benchmark by 0.6% in the third quarter. Our holdings outperformed in Japan and the emerging markets.
1 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.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities.
3 The MSCI EAFE Index (Europe, Australasia, and Far East), is a well-known, independently maintained and published large capitalization international stock index. MSCI
Standard Index Series, net of withholding tax.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
28 GMO Quarterly Update
GMO Int’l. Active Foreign Small Companies Strategy As of September 30, 2010
Inception: 1/31/95; Benchmark: S&P Developed ex-U.S. Small Cap Index
Most currencies appreciated on average relative to the U.S. dollar in the quarter.
European currencies were particularly strong relative to the U.S. dollar. The unhedged EAFE index returned +16.5%.
The Currency Hedged International Equity Strategy invests in the International Intrinsic Value (50%) and International Growth (50%)
Strategies. Performance of the Currency Hedged International Equity Strategy was ahead of the MSCI EAFE Hedged index mainly as
a result of the outperformance of the International Growth Strategy.
1 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.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities.
3 The MSCI EAFE Index (Europe, Australasia, and Far East) (Hedged) is a well-known, independently maintained and published large capitalization international stock
index that is currency-hedged into U.S. dollars. MSCI Standard Index Series.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
GMO Quarterly Update 33
Sector Weights5
Underweight/Overweight
Sector Against Benchmark Strategy Benchmark
Consumer Discretionary -1.0 18.6 % 19.6 %
Consumer Staples 2.5 8.5 6.0
Energy 2.7 4.1 1.4
Financials 2.9 19.9 17.0
Health Care -0.8 5.0 5.8
Industrials -0.4 20.0 20.4
Information Technology -9.4 3.7 13.1
Materials -2.0 6.3 8.3
Telecom. Services 8.5 12.0 3.5
Utilities -3.1 1.9 5.0
-10 -5 0 5 10
GICS Sectors
1 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.
2 Portfolio holdings are percent of equity. They are subject to change and should not be considered a recommendation to buy individual securities.
3 The MSCI World Index is a well-known, independently maintained and published global developed markets equity index. MSCI Standard Index Series, net of withholding tax.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
5 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
The overall option-adjusted spread of the Barclays Capital U.S. Aggregate index widened by 19 bps; while sector spreads widened by as
much as 75 bps, they also tightened by as much as 65 bps. CMBS spreads tightened the most during the quarter despite an increase in
delinquencies. MBS (+75 bps), triple-A credit (+29 bps), and U.S. Agency (+1 bp) spreads widened during the quarter.
Exposures to cash collateral held in the GMO Short Duration Collateral Fund (SDCF) and the GMO World Opportunity Overlay
Fund (WOOF), the assets of which were used for cash collateral, were the largest positive contributors for a sixth consecutive quarter.
Developed markets currency selection and exposure to emerging country debt via the GMO Emerging Country Debt Fund also
contributed positively during the quarter, followed by a small contribution from developed markets interest-rate positioning.
1 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.
2 The Barclays Capital U.S. Aggregate Index is a well-known, independently maintained and published index comprised of U.S. fixed rate debt issues, having a maturity of at
least one year, rated investment grade or higher by Moody’s Investors Service, Standard & Poor’s Corporation or Fitch Investors Service.
3 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
5 Please note portfolio yield includes the yield on the portfolio’s cash assets, for example, via the Short Duration Collateral Fund.
6 Regional weights are duration adjusted.
-10 -5 0 5 10
Exposures to cash collateral held in the GMO Short Duration Collateral Fund (SDCF) and the GMO World Opportunity Overlay
Fund (WOOF), the assets of which were used for cash collateral, were the largest positive contributors for a sixth consecutive quarter.
Developed markets currency selection and exposure to emerging country debt via the GMO Emerging Country Debt Fund also
contributed positively during the quarter.
1 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.
2 The Barclays Capital U.S. Treasury Inflation Notes Index is an independently maintained and published index comprised of Inflation-Protection Securities issued by the
U.S. Treasury.
3 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
5 Please note portfolio yield includes the yield on the portfolio’s cash assets, for example, via the Short Duration Collateral Fund.
6 Regional weights are duration adjusted.
-10 -5 0 5 10
-10 -5 0 5 10
-10 -5 0 5 10
1 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.
2 The Citigroup 3 Month T-Bill Index is an independently maintained and published short-term bill index.
3 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
5 Please note portfolio yield includes the yield on the portfolio’s cash assets, for example, via the Short Duration Collateral Fund.
Benchmark Composition
Strategy Composition3 (65% MSCI AC World / 35% Barclays U.S. Aggregate)
Emerging
Country Debt
0.5%
International
Strategic Intrinsic Value
Fixed Income 4.2%
7.5%
International
Inflation
Growth
Indexed Plus
1.1%
4.3% Emerging International
Domestic Equities
Bond
International
Equities
3.7% Emerging
Core Equity 8.9%
Markets
Flexible
15.7% 28.9%
Equities
12.1%
1.3%
Benchmark Composition
Strategy Composition3 (60% MSCI World / 20% Citigroup 3 Mo. T-Bill / 20% BC U.S. Agg.)
U.S. Core
Multi-Strategy
2.7%
27.0% Quality
Special
21.9% Absolute Return U.S. Equities
Situations
4.2% 20.0% 29.1%
Alpha Only
3.7%
Rising equity markets globally helped the long-only portion of the strategy as risky assets, generally, moved upward. All of the largest
equity strategies posted strong performance, and they each bested their respective benchmarks. The fixed income portion of the
strategy also delivered positive absolute results. The Multi-Strategy component rose, albeit modestly, as five of its nine underlying
strategies posted positive results.
1 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.
2 The CPI Plus 5% Index is an internally maintained benchmark based on the Consumer Price Index (CPI). The CPI is published monthly by the U.S. Government as an
indicator of changes in price levels (or inflation). The CPI + 5% Index is calculated by adding 5% annualized to the return of the CPI Index. The index is internally
blended by GMO and maintained on a monthly basis.
3 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
4 Std. Deviation is a measure of the volatility of a portfolio’s return. Sharpe Ratio is the return over the risk free rate per unit of risk. Drawdown is the largest negative
cumulative portfolio return from peak to trough. Risk profile data is gross.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
52 GMO Quarterly Update
-30 -15 0 15 30
There were three key drivers of performance for the quarter. First, the strategy had strong performance from its dividend swaps
position, which responded well to the global equity rally. The swaps trade relates to the future prospects for dividends from members
of the EuroStoxx 50 index. The apparent firming up of core economies in Europe this quarter translated into more confidence that
the dividend-paying ability of firms is strengthening. The second key driver of performance was the Quality vs. Junk trade, which
added over 250 basis points to performance. The third contributor was the long position in emerging market equities, which also
benefited from the global equity rally.
1 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.
2 The Consumer Price Index (CPI) is published monthly by the U.S. Government as an indicator of changes in price levels (or inflation).
3 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
GMO Quarterly Update 53
GMO Global All Country Equity Allocation Strategy As of September 30, 2010
Inception: 12/31/93; Benchmark: Blended Benchmark
Performance1
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since
2010 2010 Year Year Year Inception
Strategy 14.92 2.89 8.22 3.54 7.19 8.86
2
Benchmark 14.23 3.64 8.46 2.12 1.70 6.72
Annual Total Return Net of Fees (%)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Strategy 2.90 -0.27 -5.69 38.75 17.62 12.51 18.87 11.12 -31.41 24.19
Benchmark -11.45 -13.50 -19.11 33.76 14.86 9.95 20.34 10.38 -41.82 34.45
Benchmark Composition
Strategy Composition3 (MSCI AC World Index)
International
Core Equity
23.8%
Developed
Int'l. Equities
International
International
44.4%
Intrinsic Value
Growth 8.5%
8.6%
Benchmark Composition
Strategy Composition3 (MSCI World Index)
Emerging
Flexible Markets
Equities 3.2% U.S. Core
1.7% 12.2% U.S. Equities
48.5%
International
Growth
25.0%
Quality International
33.2% Equities
51.5%
International
Intrinsic Value
24.7%
Benchmark Composition
Strategy Composition3 (MSCI AC World ex-U.S. Index)
Developed
Emerging Int'l.
Markets
26.6% Emerging Markets 76.4%
International 23.6%
Intrinsic Value
36.0%
Flexible
Equities
1.6%
International
Growth
35.8%
It was the relatively large overweight to emerging market equities that drove most of the asset allocation alpha, as emerging markets
outperformed developed markets. The strategy maintained a relatively neutral balance between growth and value, and this had no
effect on asset allocation alpha, as EAFE Value and EAFE Growth indices were in line with each other.
Last quarter, it was the International Intrinsic Value Strategy that substantially beat its respective benchmark, and this quarter it was the
International Growth Equity Strategy and Emerging Markets Strategy that led the way, outperforming their benchmarks by 1.3% and
2.5%, respectively.
1 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.
2 The blended International All Country Equity Allocation Composite benchmark is comprised of a weighted average of account benchmarks; many of the account
benchmarks consist of MSCI AC World ex-U.S. or some like proxy for each market exposure they have. For each underlying account benchmark, the weighting of each
market index will vary slightly. The index is internally blended by GMO and maintained on a monthly basis.
3 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
56 GMO Quarterly Update
GMO International Developed Equity Allocation Strategy As of September 30, 2010
Inception: 11/30/91; Benchmark: Blended Benchmark
Performance1
Total Return Net of Fees (%) Average Annual Total Return (%)
3Q YTD One Five Ten Since
2010 2010 Year Year Year Inception
Strategy 17.17 3.20 4.03 2.23 7.73 8.33
2
Benchmark 16.48 1.24 3.15 2.24 3.02 6.22
Benchmark Composition
Strategy Composition3 (MSCI EAFE Index)
Emerging
Flexible Markets
Equities 3.0%
1.4%
International
Intrinsic Value
47.6%
International
Growth
47.9%
The weightings between value and growth exposures in the underlying strategies were essentially neutral, and given the parity
performance of growth and value markets, the net effect was neutral. Our minor allocation to emerging equities contributed positively
to performance, albeit modestly.
Implementation was a brighter story. In particular, the International Growth Equity Strategy beat its benchmark by 1.3%, while the
International Intrinsic Value Strategy was also able to add value.
1 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.
2 The blended International Developed Equity Allocation Composite benchmark is comprised of a weighted average of account benchmarks; many of the account
benchmarks consist of MSCI EAFE or some like proxy for each market exposure they have. For each underlying account benchmark, the weighting of each market index
will vary slightly. The index is internally blended by GMO and maintained on a monthly basis.
3 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
GMO Quarterly Update 57
Benchmark Composition
Strategy Composition3 (Russell 3000 Index)
Quality
49.2%
Large Cap
81.9%
There was essentially no difference in performance between small and large cap stocks this quarter, as the S&P 500 and the Russell
2000 returns were largely identical. Therefore, our significant tilt toward large cap had no effect on relative performance.
Within implementation, it was the U.S. Core Equity Strategy that provided the lion’s share of outperformance, as it beat its benchmark
by close to 70 basis points. The other large holding, the Quality Strategy, also beat its benchmark, albeit modestly.
1 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.
2 The blended U.S. Equity Allocation Composite benchmark is comprised of a weighted average of account benchmarks; many of the account benchmarks consist of S&P
500, Russell 3000 or some like proxy for each market exposure they have. For each underlying account benchmark, the weighting of each market index will vary slightly.
The index is internally blended by GMO and maintained on a monthly basis.
3 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
58 GMO Quarterly Update
GMO Alternative Asset Opportunity Strategy As of September 30, 2010
Inception: 4/30/05; Benchmark: Alternative Asset Opportunity Index
Performance1 Risk Profile Since 4/30/053
Total Return Net of Fees (%) Average Annual Total Return (%) Strategy
3Q YTD One Five Ten Since Std. Deviation 11.95
2010 2010 Year Year Year Inception Sharpe Ratio 0.06
Strategy 6.94 3.11 8.94 0.58 n/a 2.62 Drawdown
Benchmark 2
5.88 0.91 5.45 1.12 n/a 2.80 -37.06
(6/30/08-2/28/09)
Current Exposure4
The benchmark returned +5.9% in the third quarter: the Dow Jones-UBS Commodity index returned +11.6% and cash returned
+0.2%. Commodity prices mostly rose during the quarter, rising by as much as 49% (sugar) and by as little as 2% (crude oil). Wheat,
cotton, corn, and soy meal contract prices were also among those that rose during the quarter, by 17-34%. Only natural gas and cocoa
contract prices fell during the quarter, by 24% and 6%, respectively.
In performance attribution, overall commodity selection contribution was positive: the strategy benefited from positions in cotton, soy
meal, and natural gas contracts. While unable to offset gains, the strategy was incorrectly positioned in wheat, sugar, and corn
contracts. Exposure to the pool once used for collateral also contributed positively during the quarter.
1 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.
2 The GMO Alternative Asset Opportunity index is comprised of 50% Dow Jones-UBS Commodity Index and 50% J.P. Morgan 3 Month Cash Index. The Dow Jones-
UBS Commodity index is a rolling commodities index composed of futures contracts on physical commodities traded on U.S. exchanges. The index serves as a liquid and
diversified benchmark for the commodities’ asset class.
3 Std. Deviation is a measure of the volatility of a portfolio’s return. Sharpe Ratio is the return over the risk free rate per unit of risk. Drawdown is the largest negative
cumulative portfolio return from peak to trough. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
GMO Quarterly Update 59
0 10 20 30
Despite the outperformance of many of the underlying strategies, slight mismatches of the equity hedges resulted in a slip in
performance.
1 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.
2 The Citigroup 3 Month T-Bill Index is an independently maintained and published short-term bill index.
3 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
4 Std. Deviation is a measure of the volatility of a portfolio’s return. Sharpe Ratio is the return over the risk free rate per unit of risk. Drawdown is the largest negative
cumulative portfolio return from peak to trough. Risk profile data is gross.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
60 GMO Quarterly Update
Benchmark Composition
Strategy Composition3 (GMO Tax-Managed Global Balanced Index)
Multi-Strategy
9.1%
Tax-Managed U.S. Equities U.S. Equities
Absolute Return 23.5% 25.1%
6.0%
Fixed Income
40.0%
Municipal
Bonds
28.2%
International
Equities International
22.4%
Equities
Emerging Markets 26.7%
Emerging
Equities 8.3%
10.9%
Within the portfolio, asset allocation detracted from relative returns, while implementation contributed positively. The dominant
factor in the portfolio’s negative results from asset allocation was the portfolio’s allocation to alternative assets, which detracted sharply
from results during a double-digit quarter for equities. However the rationale behind the allocation remains solid as equity markets
continue to rise above fair value. Implementation added value moderately across global equities. The municipal bond portfolio
performed on par with the index.
1 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.
2 The blended Tax-Managed Global Balanced Allocation Composite benchmark is comprised of two components (60% MSCI AC World and 40% Barclays Capital Muni 7
Year Index). The index is internally blended by GMO and maintained on a monthly basis using the two underlying indices which are calculated by each respective
provider MSCI and Barclays Capital.
3 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
4 Alpha is a measure of risk-adjusted return; Beta is a measure of a portfolio’s sensitivity to the market; R2 is a measure of how well a portfolio tracks the market;
Sharpe Ratio is the return over the risk free rate per unit of risk. Risk profile data is gross.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
GMO Quarterly Update 61
-10 -5 0 5 10
Positive returns were generated in each of our major investment categories: quantitative, special situations, fundamental value, and top
down quality allocation.
With equity markets up substantially for the quarter, we have started to sell down some of our fundamental value holdings, which have
become less attractive from a value perspective.
The pick-up in M&A activity has given us the opportunity to selectively add new positions in our special situations portfolio.
Additionally, during the quarter we launched a new strategy that sells volatility (by the writing of put and call options) on individual
equities where we believe the market is paying too much for protection. It, too, added value for the period, albeit off of a small but
growing capital base.
1 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.
2 The Citigroup 3 Month T-Bill Index is an independently maintained and published short-term bill index.
3 Std. Deviation is a measure of the volatility of a portfolio’s return. Sharpe Ratio is the return over the risk free rate per unit of risk. Drawdown is the largest negative
cumulative portfolio return from peak to trough. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010. Exposure
information is not normalized and shown as a percent of total net assets.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
62 GMO Quarterly Update
-4 -2 0 2 4
Positive absolute returns were generated in the high quality long portfolio, but these returns were not enough to offset the
performance in the short portfolio. Short positions in low beta and high volatility sectors – especially Industrials, Materials, and
Financials – were a drag on performance as the risk trade returned to the table.
The significant long bet in mega cap stocks and short bet in mid cap stocks were both disappointing for the quarter. Two of the three
largest industrial sector bets – Consumer Staples and Health Care – had a negative impact. The third leg of that stool, Information
Technology, was positive as several high quality technology names rebounded. This group, however, remains negative for the year.
The portfolio’s average net exposure for the quarter was 1% net long.
1 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.
2 The Citigroup 3 Month T-Bill Index is an independently maintained and published short-term bill index.
3 Std. Deviation is a measure of the volatility of a portfolio’s return. Sharpe Ratio is the return over the risk free rate per unit of risk. Drawdown is the largest negative
cumulative portfolio return from peak to trough. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010. Exposure
information is not normalized and shown as a percent of total net assets.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
GMO Quarterly Update 63
GMO Emerging Country Debt Long/Short Strategy As of September 30, 2010
Inception: 3/31/96; Benchmark: J.P. Morgan U.S. 3 Month Cash Index
Performance1 Risk Profile Since 3/31/963
Total Return Net of Fees (%) Average Annual Total Return (%) Strategy
3Q YTD One Five Ten Since Std. Deviation 16.04
2010 2010 Year Year Year Inception Sharpe Ratio 0.78
Strategy 6.15 12.94 17.47 6.13 9.92 11.76 Drawdown
Benchmark 2
0.20 0.36 0.46 3.56 3.17 4.02 -51.97
(4/30/98-9/30/98)
-20 -10 0 10 20
The portfolio has a beta of 0.4 to the credit spread risk of the J.P. Morgan EMBIG. Its interest rate duration was low, so it did not
benefit from the 44-basis-point drop in U.S. interest rates. On the other hand, the portfolio did benefit from the fall in spreads for the
asset class, from 359 basis points to 305 basis points.
The strategy targets absolute return by taking long and short positions in the same countries. Large holdings in Argentina, Colombia,
and Venezuela contributed positively to returns, as the wide spreads in those countries narrowed with improving fundamentals.
1 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.
2 The J.P. Morgan U.S. 3 Month Cash Index is an independently published and maintained index. The index measures the total return performance of a constant-maturity
euro-currency deposit, the only short-term securities consistent across all markets in terms of liquidity, maturity, and credit quality. The J.P. Morgan U.S. 3 Month Cash
Index is calculated daily for three-month deposits in the United States. It is maintained and calculated by J.P. Morgan and is not actively managed.
3 Std. Deviation is a measure of the volatility of a portfolio’s return. Sharpe Ratio is the return over the risk free rate per unit of risk. Drawdown is the largest negative
cumulative portfolio return from peak to trough. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
64 GMO Quarterly Update
GMO Currency Hedge Strategy As of September 30, 2010
Inception: 7/31/03; Benchmark: J.P. Morgan U.S. 3 Month Cash Index
Performance1 Risk Profile Since 7/31/033
Total Return Net of Fees (%) Average Annual Total Return (%) Strategy
3Q YTD One Five Ten Since Std. Deviation 12.63
2010 2010 Year Year Year Inception Sharpe Ratio 0.00
Strategy 4.01 2.09 9.70 -2.34 n/a 0.26 Drawdown
Benchmark 2
0.20 0.36 0.46 3.56 n/a 3.09 -41.19
(6/30/07-12/31/08)
The U.S. dollar declined broadly in the third quarter, with much of the fall coming subsequent to indications in September that the
U.S. Federal Reserve would re-engage its quantitative easing policy. Swedish krona and Australian dollar were the two biggest gainers,
rising 15.6% and 14.6%, respectively. Sweden was one of only three developed countries to raise policy interest rates, increasing them
by 50 basis points to 0.75%. In Australia, surging commodity prices added to the Australian dollar’s allure, where the 4.5% policy rate
offers a welcomed carry relative to commodities themselves.
The euro witnessed a fairly substantial reversal of fortunes, rising by 11.5%. In the prior quarter, the euro declined by 9.5% amidst
worries over the health of weaker euro members. During the third quarter, the much anticipated release of the bank stress tests served
to calm market fears, even as many market participants flagged the flawed design of the tests themselves. In what must be good news
for the Swiss National Bank, which had earlier accumulated substantial euro holdings in trying to drive the Swiss franc weaker, the euro
rose by nearly 1% relative to the Swiss franc.
In September, the Bank of Japan surprised the market when it engaged in its first yen-weakening, unilateral intervention since 2004.
Although this limited September’s rise to only 0.5%, the yen was still up 5.9% for the quarter.
A long position in the Australian dollar was the strategy’s largest contributor, followed by longs in the yen, Norwegian krone, and the
New Zealand dollar. The shorts in Canadian dollars, Swiss francs, the euro, sterling, and Swedish krona detracted.
1 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.
2 The J.P. Morgan U.S. 3 Month Cash Index is an independently published and maintained index. The index measures the total return performance of a constant-maturity
euro-currency deposit, the only short-term securities consistent across all markets in terms of liquidity, maturity, and credit quality. The J.P. Morgan U.S. 3 Month Cash
Index is calculated daily for three-month deposits in the United States. It is maintained and calculated by J.P. Morgan and is not actively managed.
3 Std. Deviation is a measure of the volatility of a portfolio’s return. Sharpe Ratio is the return over the risk free rate per unit of risk. Drawdown is the largest negative
cumulative portfolio return from peak to trough. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
GMO Quarterly Update 65
GMO Fixed Income Hedge Strategy As of September 30, 2010
Inception: 8/31/05; Benchmark: J.P. Morgan U.S. 3 Month Cash Index
Performance1 Risk Profile Since 8/31/053
Total Return Net of Fees (%) Average Annual Total Return (%) Strategy
3Q YTD One Five Ten Since Std. Deviation 15.69
2010 2010 Year Year Year Inception Sharpe Ratio -0.47
Strategy 2.41 8.77 10.86 -5.90 n/a -5.97 Drawdown
Benchmark 2
0.20 0.36 0.46 3.56 n/a 3.56 -48.54
(5/31/06-1/31/09)
-2 -1 0 1 2
In spot terms, all but one of the emerging currencies rose during the quarter, with the only laggard the Argentine peso at -0.8%.
Including carry, however, even the peso gained with a +1.4% total return. Renewed confidence in the euro subsequent to the bank
stress tests led to a +11.5% quarterly return for the single currency, and even larger gains among the periphery. Czech crown rose by
16.5%, Polish zloty by 16%, Hungarian forint by 14.9%, and Romanian leu by 14.0%. Such gains easily erased the prior quarter’s
losses.
In Asia, the Chinese renminbi rose by 1.3%, its first notable quarterly rise in two years. This led to strength across the region, with 2%
+ gains in Korea, Thailand, Singapore, Philippines, Malaysia, India, and Taiwan. In Latin America, the big winner was Chilean peso,
+12.8%, which followed the upward trajectory of copper prices.
Currency positioning accounted for most of the positive attribution, particularly the long positions across CEEMEA and much of
Asia.
1 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.
2 The J.P. Morgan U.S. 3 Month Cash Index is an independently published and maintained index. The index measures the total return performance of a constant-maturity
euro-currency deposit, the only short-term securities consistent across all markets in terms of liquidity, maturity, and credit quality. The J.P. Morgan U.S. 3 Month Cash
Index is calculated daily for three-month deposits in the United States. It is maintained and calculated by J.P. Morgan and is not actively managed.
3 Std. Deviation is a measure of the volatility of a portfolio’s return. Sharpe Ratio is the return over the risk free rate per unit of risk. Drawdown is the largest negative
cumulative portfolio return from peak to trough. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
GMO Quarterly Update 67
-60 -30 0 30 60
Completion
15.7%
Systematic
Global Macro
13.6%
Aggressive
Emerging Country
Long/Short
Debt L.P.
11.1%
9.9%
Tactical
Opportunities
14.7%
Strong performance by the Emerging Country Debt Long/Short Strategy helped immensely. Large holdings in Argentina, Colombia,
and Venezuela contributed positively to returns, as the wide spreads in those countries narrowed with improving fundamentals. The
Emerging Currency Hedge Strategy also did well. A long position in the Australian dollar was the strategy’s largest contributor,
followed by longs in the yen, Norwegian krone, and the New Zealand dollar.
The Tactical Opportunities Strategy, which has a long quality/short junk position, detracted from performance this quarter, as the
short position in junk was hurt by the strong risk rally in September. While the long quality positions participated in this rally as well,
they did so to a lesser degree.
1 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.
2 The Citigroup 3 Month T-Bill Index is an independently maintained and published short-term bill index.
3 Std. Deviation is a measure of the volatility of a portfolio’s return. Sharpe Ratio is the return over the risk free rate per unit of risk. Drawdown is the largest negative
cumulative portfolio return from peak to trough. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
70 GMO Quarterly Update
-20 -10 0 10 20
Global equity markets recovered from their second quarter declines in July, receded in August, and rebounded in September. While
the stocks in the long and short portfolios performed comparably to each other in July and August, the long portfolio posted a
moderately stronger showing in September. The long portfolio favored Consumer Discretionary stocks, especially retailers, which
participated strongly in September’s advance. While the short portfolio’s Information Technology positions generally outpaced the
market, these advances were offset by selections within Materials and Health Care, which did not participate in the market rise.
1 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.
2 The Citigroup 3 Month T-Bill Index is an independently maintained and published short-term bill index.
3 Std. Deviation is a measure of the volatility of a portfolio’s return. Sharpe Ratio is the return over the risk free rate per unit of risk. Drawdown is the largest negative
cumulative portfolio return from peak to trough. Risk profile data is gross.
4 The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
The performance information above is supplemental to the GIPS® compliant presentation that was made available on GMO’s website in April of 2010. Exposure
information is not normalized and shown as a percent of total net assets.
GIPS ® compliant presentation is available at www.gmo.com.
GMO © 2010
GMO Quarterly Update 71
Citigroup 3 Month T-Bill ++ Citigroup The Citigroup 3 Mo. TBill ++ Index is comprised of 3 Month LIBOR from 5/31/2003 to
Index 8/31/2009, and Citigroup 3 Mo. TBill Index thereafter.
CPI Index U.S. Government/GMO The CPI (Consumer Price Index) is published monthly by the U.S. Government as an indicator of
changes in price levels (or inflation).
CPI Plus 5% Index U.S. Government/GMO An internally maintained benchmark based on the Consumer Price Index (CPI). The CPI is
published monthly by the U.S. Government as an indicator of changes in price levels (or inflation).
The CPI Plus 5% Index is calculated by adding 5% annualized to the return of the CPI Index. The
index is internally blended by GMO and maintained on a monthly basis.
GMO Alternative Asset GMO The GMO Alternative Asset Opportunity index is comprised of 50% Dow Jones-UBS Commodity
Opportunity Index Index and 50% J.P. Morgan 3 Month Cash Index. The Dow Jones-UBS Commodity index is a
rolling commodities index composed of futures contracts on physical commodities traded on U.S.
exchanges. The index serves as a liquid and diversified benchmark for the commodities’ asset class.
GMO Blended Global All GMO The blended Global All Country Equity Allocation Composite benchmark is comprised of a weighted
Country Equity Allocation average of account benchmarks; many of the account benchmarks consist of MSCI AC World or
Index some like proxy for each market exposure they have. For each underlying account benchmark, the
weighting of each market index will vary slightly. The index is internally blended by GMO and
maintained on a monthly basis.
GMO Blended Global GMO The blended Global Balanced Asset Allocation Composite benchmark is comprised of a weighted
Balanced Asset Allocation average of account benchmarks; many of the account benchmarks consist of S&P 500, MSCI ACWI
Index and Barclays Capital Aggregate or some like proxy for each market exposure they have. For each
underlying account benchmark, the weighting of each market index will vary slightly. The index is
internally blended by GMO and maintained on a monthly basis.
GMO Blended Global GMO The blended Global Developed Equity Allocation Composite benchmark is comprised of a weighted
Developed Equity Allocation average of account benchmarks; many of the account benchmarks consist of MSCI World or some
Index like proxy for each market exposure they have. For each underlying account benchmark, the
weighting of each market index will vary slightly. The index is internally blended by GMO and
maintained on a monthly basis.
GMO Blended International GMO The blended International All Country Equity Allocation Composite benchmark is comprised of a
All Country Equity Allocation weighted average of account benchmarks; many of the account benchmarks consist of MSCI AC
Index World ex-U.S. or some like proxy for each market exposure they have. For each underlying account
benchmark, the weighting of each market index will vary slightly. The index is internally blended by
GMO and maintained on a monthly basis.
GMO Blended International GMO The blended International Developed Equity Allocation Composite benchmark is comprised of a
Developed Equity Allocation weighted average of account benchmarks; many of the account benchmarks consist of MSCI EAFE
Index or some like proxy for each market exposure they have. For each underlying account benchmark, the
weighting of each market index will vary slightly. The index is internally blended by GMO and
maintained on a monthly basis.
GMO Blended Real Return GMO The blended Real Return Global Balanced Asset Allocation Composite benchmark is comprised of a
Global Balanced Asset weighted average of account benchmarks; many of the account benchmarks consist of MSCI World,
Allocation Index Barclays Capital Aggregate, and Citigroup 3-Month T-Bill or some like proxy for each market
exposure they have. For each underlying account benchmark, the weighting of each market index will
vary slightly. The index is internally blended by GMO and maintained on a monthly basis.
GMO Blended Tax-Managed GMO The blended Tax-Managed Global Balanced Allocation Composite benchmark is comprised of two
Global Balanced Index components (60% MSCI AC World, 40% Barclays Capital Muni 7 Year (6-8) Index). The index is
internally blended by GMO and maintained on a monthly basis using the two underlying indices
which are calculated by each respective provider MSCI, and Barclays Capital.
GMO Blended U.S. Equity GMO The blended U.S. Equity Allocation Composite benchmark is comprised of a weighted average of
Allocation Index account benchmarks; many of the account benchmarks consist of S&P 500, Russell 3000 or some like
proxy for each market exposure they have. For each underlying account benchmark, the weighting of
each market index will vary slightly. The index is internally blended by GMO and maintained on a
monthly basis.
J.P. Morgan Emerging Markets J.P. Morgan Independently maintained and published index composed of debt securities of countries, which
Bond Index Global includes Brady bonds, sovereign debt, local debt and Eurodollar debt, all of which are U.S. dollar
denominated.
J.P. Morgan Emerging Markets GMO The J.P. Morgan Emerging Markets Bond Index Global + is comprised of the J.P. Morgan EMBI
Bond Index Global + prior to 8/31/1995, J.P. Morgan EMBI + through 12/31/1999, and the J.P. Morgan EMBI Global
thereafter.
72 GMO Quarterly Update