GMO abandons bond market - FT.com GMO, the Boston-based asset manager, says it has "given up" on the bond market, deciding to ditch long-dated sovereign debt as investors continue to pour billions into government bonds, including US Treasuries. Ben Inker, co-head of asset allocation for the $104bn group, told the Financial Times it is holding large, high-quality companies in the US but that its main bet is to keep money on the sidelines while it waits for better times. If GMO is right and prices of government debt fall, its decision to offload bonds could prove to be a coup to rival its refusal to buy dotcom stocks well before the peak of the internet bubble in 2000. Back then, it suffered three years of investor outflows before eventually being proved right. Its approach to the bond market now is similar. "We've largely given up on traditional fixed income," says Mr Inker in an interview. He sold what was the last refuge of reasonably priced long-dated debt - Australian and New Zealand bonds - near the start of the year. But his dislike of fixed income does not mean he is a fan of stocks. The most enthusiasm he can muster for equities is an uneasy liking for Japanese stocks: "I wouldn't want to put all my money in Japan. It looks cheap, but it's got issues. Rather, Mr Inker says that he is waiting for better times; forty per cent of a benchmark free asset allocation hedge fund he oversees is in "dry powder." The only time it has held more cash was in late 2007, ahead of the financial crisis, he says. A tenth of the portfolio is in emerging market and asset-backed paper and the rest is in stocks for want of anywhere safer. "There are places where stocks look ostensibly cheap, say Europe, Japan, emerging markets," says Mr Inker. But all of that is predicated on today's profit margins being sustainable and we don't think that they're sustainable anywhere. In the US, he buys large, high quality companies that are "somewhat overvalued" but ultimately resilient - the Coca-Colas and Johnson & Johnsons. However, he thinks US corporate profits are set to fall even if growth picks up, in part because of an issue that was prominent in the presidential election - growing income inequality. One of the things that happens as profits grow as a per cent of gross domestic product is income becomes more and more unequal because the ownership of capital is extraordinarily uneven. And there's a natural tension that forms there from a societal perspective. He says that since the financial crisis, government spending has supported the economy and so profits. But a pick-up in growth requires higher consumption, and the only way to get that is through higher incomes, which must come from profits. US corporate profits peaked at the end of last year at over 10 per cent of GDP, he says, and are now 9.3 per cent. The long-run average is around 6 per cent. So the bulk of his cautious stock allocations are to Europe, emerging markets and Japan. In Europe, profits have come down already as governments have taken the medicine of austerity, and valuations are cheap but nerve-inducing. A disorderly break-up of the euro remains the big "undiversifiable risk," says Mr Inker. Emerging markets are fairly valued but "scary" due to the unknown path for China. That leaves Japan. There has been no growth in the book value of Japanese companies for 22 years, says Mr Inker. But finally, Japan looks cheap on the basis of long-term average profit levels.