7-Year Asset Class Forecasts
By Barry Ritholtz - January 29th, 2010, 12:00PM
For you fans of Asset Allocation (and I am one of them) here is GMO’s 7-year asset class forecasts as of December 31, 2009.
Note the dotted red line across the middle — that represents the historical returns of US Equities as a class.
Underperforming in GMO)’s opinion are US equities and bonds; Outperforming are Emerging markets, large cap international stocks, and Timber.
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I think that does it for Jeremy Grantham Week!
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Source:
GMO 7-Year Asset Class Forecasts (4Q 2009)
GMO Asset Allocation Team – Published 1/12/2010
https://www.gmo.com/
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January 29th, 2010 at 12:16 pm
What stocks or characteristics make up “US High Quality”?
January 29th, 2010 at 1:08 pm
Barry,
Okay, that’s nice. But is it credible? What is the record of past GMO 7-Year Asset Class Return Forecasts?
January 29th, 2010 at 1:17 pm
I just finished reading Bailout Nation this morning, and now I am so depressed.
January 29th, 2010 at 1:24 pm
Two things
1. Only “High Quality” beats the historical US Equity return until you add the alpha GMO expects to add (clear part of bar).
2. High quality as I understand their def is : Large, strong franchise & market leading, low debt ratio, earnings growers.
January 29th, 2010 at 1:25 pm
High quality is an S&P rating term. Roughly, it means blue-chips (large companies with long-term earning power and low debt) like Microsoft, Walmart, P&G, Coke, etc. Grantham has been hammering away at this theme for some time now, that the junk stocks are being favored over blue chips either because they offer more leverage or because they attract momentum investors due to their volatility or because they are takeover candidates. My projection is for stagnation for years to come, with low rates of interest to rebuild bank capitalization but low profits at the real businesses. This is going to be bad news for blue chips. People will buy store brands rather than name brands and switch to OpenOffice rather than MS Office, etc. Whereas the junk stocks should prosper as interest rates decline, assuming they can avoid bankruptcy. So I’m not sure I agree with Grantham’s thesis. Anyway, Grantham has also said that he finds the US market to be “depressingly efficient”. That is, GMO has a very hard time extracting alpha via relative value trades. Which contradicts the notion that GMO can extract huge amoutns of alpha (just look at that chart above!) by simply biasing their stock selection towards blue-chips.
January 29th, 2010 at 1:36 pm
Grantham appears to be premising his proposed asset allocation on a prediction of benign inflation over the next 7 years. He may well be right in terms of the most probable scenario, but inflation is where most of the tail risk is right now. How useful is an allocation strategy that is not sufficiently risk adjusted for inflation tail risk, which I’m not sure can even be called tail riskwhen you have a FED chair who has made an explicit endorsement of the printing press?
January 29th, 2010 at 1:54 pm
Where’s gold?
January 29th, 2010 at 2:31 pm
Hard to diss Grantham. When you are running his kind of money 1% alpha amounts to more money than you or I will ever see. Last 7 year forecast did pretty well as I recall. Most important Grantham like our kindly host has been an astute and literate commentator thru the recent craziness.
January 29th, 2010 at 2:54 pm
They all look reasonable, except for managed timber, which looks too high.
January 29th, 2010 at 3:54 pm
Edward Tower at the Economics Department of Duke University published a report titled “Are GMO’s Predictions Prescient? Using them to predict Vanguard’s Mutual Fund Returns. The results showed that these predictions are useful guides for asset selection. The seven year correlations between GMO’s predictions for equities and the ranking of Vanguard’s funds was r2 = 0.939 for equities and for bonds it was 0.824. The seven year forecasts are impressively accurate compared to your typical forecasts and ARE useful for asset class selection
January 29th, 2010 at 5:01 pm
Barry, I’ve been wondering for many years:
Fama, French, et. al. demonstrated long ago that you can’t beat the market by choosing stocks. (Or at least, that we can’t tell whether you can cause it’s lost in the noise.)
But has anyone researched whether any managers beat the market (beyond the bell curve) by choosing asset classes?
I’ve searched but haven’t found. ??
January 29th, 2010 at 5:04 pm
interesting that only one has mentioned the ‘Managed Timber’ category..
I was thinking that, if We had a modicum of freedom left, Industrial Hemp plantations would trounce ‘Managed Timber’..
but, alas, all We get is “Managed Timbre”–from ‘our Representatives’..
http://www.thefreedictionary.com/timbre
January 29th, 2010 at 8:13 pm
rnldcook,
Thanks for the information. Without a historical perspective one can not know if a forecast can be believable. (Except for those on CNBC, of course.)
January 30th, 2010 at 1:51 am
most of the high quality can be had in Dow Jones Industrial average.. you know the headline/newspaper stock market number but not what most equity managers are benchmarked against, though the weightings are different. Also in his latest letter he mentioned that emerging markets are already over-valued along with the S&P 500… though he can find more alpha in EM..