Gmo: The Value Versus Growth Dilemma

16 Pages Posted: 21 Oct 2008

See all articles by William Burton

William Burton

University of Virginia - Darden School of Business

George Allayannis

University of Virginia - Darden School of Business

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Dick Mayo, one of the most celebrated value investors in America was puzzled by the New Economy's continuous bias toward growth investment strategies. He examines the basics of his philosophy versus that of a growth orientation by evaluating the long-term expected returns of several value and growth stocks. This case can be used to pursue several objectives: (1) to define value and growth investing--where the differences lie and whether one approach is superior to the other or whether both have merit; and (2) to discuss issues related to consistency of one's investment philosophy. Should one stay true to one's philosophy even when the market seems to run counter to it for a prolonged period of time? Can value investing deliver value in this New Economy or is it only an Old Economy concept? The students are instructed to perform basic valuations of Cisco Systems (a growth company), CVS, R.R. Donnelley, and Manor Care (value companies) and compute their long-term expected returns. The case comes with an Excel spreadsheet containing the data and relevant valuation ratios for the above firms. The valuations are straightforward, but they tell an interesting story: the expected returns of glamorous stocks in reality may not be so glamorous.



GMO: The Value Versus Growth Dilemma

As his computer screen displayed the reflection of nearby yachts moored in scenic Boston Harbor, Dick Mayo could not help but recall the image of ships passing in the night. It was March 2000, and Mayo had recently witnessed the NASDAQ Composite Index, which had come to represent the new economy of technology and Internet stocks, shoot past the 5,000 mark for the first time ever. As one of Grantham, Mayo, Van Otterloo, & Co. LLC's (GMO) founding partners, and the portfolio manager of GMO's U.S. Active institutional equity accounts, however, Mayo had also watched his investment philosophy (identifying fundamentally sound, and sometimes unexciting, companies trading below intrinsic value) rejected in favor of the market's insatiable appetite for hypergrowth technology stocks. Investment cycles within the capital markets were common, yet the NASDAQ's dramatic ascent embodied an unprecedented divergence between the performance of value and growth investment styles. In the 30 years that he had been in the investment business, the past two years had been the most frustrating for Mayo. Although his long-term performance still outpaced the returns of the benchmark S&P 500 Index of large capitalization stocks, the past two years had brought down an otherwise lofty performance record. Exhibits 1 and 2 show graphs of index capital appreciation and relative total return data.

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Keywords: investment analysis, portfolio management

Suggested Citation

Burton, William and Allayannis, George, Gmo: The Value Versus Growth Dilemma. Darden Case No. UVA-F-1328, Available at SSRN:

William Burton

University of Virginia - Darden School of Business

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

George Allayannis (Contact Author)

University of Virginia - Darden School of Business ( email )

Box 6550
Charlottesville, VA 22906-6550
United States
434-924-3434 (Phone)


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