Click to enlarge
GMO 7-Year Asset Class Real Return Forecasts: 2007



Have a look at the charts above and below. They are from James Montier’s GMO Quarterly Letter, July 2013, titled The Purgatory of Low Returns; you can download the full PDF here (registration may be req’d).

(Note to Josh: This quarter, Ben Inker and Montier filled in for the big dog in the quarterly letter. Even Grantham misses a letter deadline sometimes! )

The chart above is forward 7 year asset class return expectations from 2007. The chart below shows the same forward 7 year asset class return expectations from 2013.

Notice where the potential best returns are: For long term and patient investors, the opportunities for the best return on investment are places that may be somewhat uncomfortable today: Emerging Markets, which have been shellacked and are widely reviled following that collapse; International large and small cap, which means in no small measure Europe. And lastly, US high quality companies — which many people insist are on the verge of rolling over.

Whether you agree with these views or not, you must recognize that Grantham’s methodology is sound and that his long term track record is outstanding. He tends to be early, but that’s no surprise when you think in terms of investment arcs of 7 years.

If you run an asset allocation model (as we do), you should think about increasing your exposure to EM and Europe — but only if you (and/or your clients) are patient investors.

Many people believe they are patient investors, but few actually behave that way.




GMO 7-Year Asset Class Real Return Forecasts: 2013
Source: GMO




The Purgatory of Low Returns
James Montier
GMO Quarterly Letter, July 2013

Category: Asset Allocation, Cycles, Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

15 Responses to “The Purgatory of Low Returns”

  1. VennData says:

    Seven years? What about this quarter?!

  2. nofoulsontheplayground says:

    I would qualify that as increasing exposure to emerging markets with favorable demographics (Brazil, India, etc).

  3. AG Sage says:

    Isn’t a lot of EM big development being funded right now by the Chinese? I expect that money to dry up a bit in the next 4-5 years.

  4. TheRedBeardedWonder says:

    What’s the differentiation between Large Caps and High Quality? Standard blue chips?

    • Large is strictly size driven — AIG was large, as was Citi and Merrill

      High quality is typically a function of earnings quality and lack of accounting gamesmanship.


    • rd says:

      Generally the S&P 500 would be large cap. The high quality would be the types of stocks that a value shop like GMO would look for. In an index fund, a large cap RAFI or high dividend yield index fund would be a close substitute.

  5. hieronymus says:

    I looked thru the full report and cannot find a description for the “high quality” US equities. What’s the benchmark? Anyone want to hazard aguess?

  6. Anonymous Jones says:

    I kinda get that you could look at Europe and say, on average, it will outperform.

    But to me, it seems to be a terribly uncomfortable, high variance investment play. Either (1) there’s movement toward a fiscal union, in which case investors in Europe will be laughing at all of us not on Go Europe Cheerleader Squad, or (2) the Euro completely implodes, and Figurative Carnage is the European investor’s fate. On a 7-year time horizon, I’d think it’s one or the other at this point, with very little chance of an in-between (odds of grinding deflation and high unemployment with no political impact over 7 years…sorry, just can’t believe that’s high). So, yes, I do have hope Europe will choose integration. And maybe averaging the expected value from these distinct outcomes yields a positive return, but wow, life is not a Monte Carlo simulation. You only get one. I don’t like that risk profile.

    • I appreciate you trying to war game out possible scenarios. However, there are many other possible outcomes, including things we cannot we are not conceiving of, that make that exercise so problematic. See our prior discussions on Macro-tourists.

      I am keeping it simpler: Mean reversion, relative value, and actually cheap make EM/Europe attractive, even if from a contrarian perspective

    • Anonymous Jones says:

      I guess this came out wrong. I don’t claim to have a better insight to the future nor do I think there are no other possible outcomes.

      I just meant to convey that I have an unsubstantiated belief that the probability weighting of the outcomes for Europe (not EM) is closer to two giant poles (i.e., a continuous probability distribution that is a Bimodal rather than, for example, Gaussian or Poisson or Continuous Uniform). No doubt the future holds many things I have not considered. But some strategies are more high variance (like a lottery) than others (buying Walmart shares on an unleveraged basis), and I would be surprised to find this variance assertion subject to much reasonable dispute

      The core of my unsubstantiated belief is that a common currency in an area not suited for a common currency sets up a situation that approaches a binary outcome, thus the need to dispense with the probability densities that are Gaussian, etc. That belief may be indeed be incorrect. Everything’s a guess really (though some guesses are more incoherent and less well founded, I agree).

  7. rd says:

    It is interesting that most of their bars have totally changed in these two snapshots but a notable few have not changed significantly: the three US stocks, emerging debt, and managed timber.

    The major changes have been that International stocks have gone positive and most debt has gone negative.

    GMO’s 7-year forecasts have been pretty good for setting overall allocations, but it usually takes 2-3s from when one of these snapshots is published for the real events to unfold.

  8. san_fran_sam says:

    FYI — I did not need to register.

    BTW, Hussman has been showing a history of like this for 10 year periods.

    What to do with my idle cash? Patience, grasshopper, patience.

  9. perpetual_neophyte says:

    Thanks for posting this. I was curious to see how those earlier projections stacked up, so I ran some really quick numbers using total return indices.

    2007-06-30 through 2013-06-30, total return, annualized, less 2.13% average CPIAUCSL over that time frame

    S&P 500 (US large-cap) = 1.23%
    S&P 400 (US mid-cap) = 3.89%
    S&P 600 (US small-cap) = 3.27%

    I understand I am using a 6-year window so it’s not a completely fair comparison. I’ll be curious to go back and check on some of the other assumptions and see if I can dig up the 7-year projections from 2006 and earlier to have a better measure.

    Are the numbers along the bottom of the first chart the expected accuracy range? That is, US large cap equities were expected to return -1.8% plus or minus 6.5% per year? That’s a pretty big range.