In a new GMO white paper, 25 Years of Benchmark-Free Investing1, Ben Inker, Co-Head of GMO's Asset Allocation team, looks back on a quarter century of managing money without an investable benchmark, and forward to a decade that he argues looks uncomfortably familiar. The piece is part retrospective, part confession, and part warning. It is also unusually candid for a firm marking a milestone.
Redefining the Problem
The origin story begins in the fall of 1999. GMO argued that the S&P 500 and large-cap growth globally had become a bubble, and that a traditional 60/40 portfolio was priced to deliver roughly 2% real over the following decade, well short of the 5% real most institutions require. Inker's own exhibit for that year's client conference showed something else: with TIPS at 4% real, REITs yielding 9%, and emerging markets still cheap after 1997-98, a 5% to 5.75% real target looked achievable with lower volatility than 60/40 (Exhibit 1).
The diagnosis was correct. Exhibit 2 shows 60/40 delivered 1.3% real from 1999 to 2009, while the proposed portfolios earned 6.0% to 6.9%. As Inker puts it, "The exhibit turned out to be almost eerily prescient." The problem was credibility. GMO was underperforming at the time, and Inker admits, "we were exactly the wrong messengers to give investors this news."
The first client arrived in 2001, a foundation with no investment committee and, in Inker's words, "astonishingly free of the agency issues that compel many investors to believe they need to own a traditional-looking portfolio." That framing matters. The strategy was never simply a different benchmark; it was a rejection of what Inker calls managing "to the test."
The Record
Since inception, the Benchmark-Free Allocation Strategy has returned 5.7% real net of fees versus 4.0% for 60/40, with a maximum drawdown of 19.3% against 35.7%. It "has also lost only half as much on average during the five major 60/40 drawdowns since the launch of the strategy."
The differentiators are valuation, high conviction, a broad toolkit, and a fourth feature that reframes the first three: risk defined as absolute loss, not tracking error. The rotation away from expensive assets "can become total," and Inker notes that "there is no major asset that has been represented in Benchmark-Free for the entirety of its 25-year life." Exhibit 3 shows the strategy is more active than 95% of global allocation funds. Exhibit 4 traces the shifts: 60% equities in 2003, 25% by August 2008, back to 52% in April 2009, and 60% in liquid alternatives by the end of 2021, ahead of the 2022 duration bust.
Risk is framed around what causes lasting capital impairment: "bad recessions, significant unanticipated inflation, and severe liquidity shocks." That lens dissolves asset-class silos. Emerging debt and U.S. small caps compete for the same recession budget; emerging debt and relative-value strategies compete for the same liquidity budget. And valuation drives risk, not just return. Inflation-linked bonds at negative real yields, Inker observes, "can be even more vulnerable than traditional bonds, as investors learned in 2022."
What Went Wrong
To be fair, the misses are treated as seriously as the hits. The costliest was under-owning U.S. equities after 2010. GMO read high margins as cyclical when, as Exhibit 5 shows, return on capital for the largest 50 U.S. companies rose to record levels while the median large company saw falling profitability. "The explanation is almost certainly a pronounced and historically unique increase in market power among the very largest companies in the U.S., which we were too slow to recognize." Forecasting methodology has since changed.
The second miss was emerging markets from 2015 to 2021, a "value trap" Inker attributes to a "fundamental bubble" (Exhibit 6). EM fundamentals grew 8.8% a year from 2002 to 2014, then flat through 2021. China's fundamental return lagged global equities by 4.3% annualized over the subsequent decade.
Looking Ahead
The forward view is the sharpest section. "Today, we see a different group of companies whose fundamentals have been growing at an unsustainable rate," Inker writes, "the AI plays." Exhibit 7 shows a traditional portfolio forecast at negative real returns under normal rates, while the unconventional mix sits near 5% to 6%. The prescription: "You don't need to take crazy amounts of risk to make decent returns going forward. But our best guess is that you do need to be willing to look different." Japanese small caps, global deep value, and liquid alternatives are named as pillars.
Five Takeaways
1. Absolute risk, not tracking error, is the risk that matters to end investors.
2. Concentrated indices are the problem, not a shortage of reasonably priced assets.
3. Valuation shapes downside risk as much as expected return.
4. Fundamental bubbles can be as dangerous as valuation bubbles.
5. The strategy's returns went to those who stayed; clients "have tended to abandon the strategy after a bout of relative underperformance."
Footnote:
1 Inker, Ben. 25 Years of Benchmark-Free Investing: Improving Returns and Reducing Risk by Redefining the Problem. GMO, Sept. 2026, https://www.gmo.com/globalassets/articles/white-paper/2026/gmo_25-years-of-benchmark-free-investing_9-26.pdf.
