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Jeremy Grantham/GMO Asset Class Performance Forecasts
Can anyone provide clear details on identifying and differentiating "US High Quality" from "US Large"? What are specific mutual funds and exchange traded funds that would correctly fit into the category of "US High Quality" per the GMO chart?
Inker defined a high-quality stock as one that has high profitability throughout an economic cycle, stable profitability and low debt. Some such high-quality stocks are trading at a lower price-earnings ratio than the broad market is, so investors can obtain them at a discount, he noted.
ETFdb: The iShares fund takes a factor-based approach in trimming down the starting universe by employing a series of fundamental metrics screens to narrow down only the highest-quality of companies.
The methodology behind QUAL is based on three metrics of quality: high return on equity, stable year-over-year EPS growth, as well as low debt-to-equity.
Powershares: The [ETF is based on an] Index [that] is designed to provide exposure to the constituents of the S&P 500 Index that are identified as stocks reflecting long-term growth and stability of a company's earnings and dividends.
I would think the Dividend Achievers Index would also meet the qualifications of stable profits and low debt. VIG or SCHD. For a '40 Fund, PRBLX, VDIGX, SEQUX, MPGFX all pay lip service to the same sorts of things.
thanks mrdarcey. I'll have to take a look at those. I believe there have been some articles this year, possibly one by Larry Swedroe, saying that dividends were getting quite popular and therefore expensive.....so that the P/E ratios on some of the dividend exchange traded funds was too high. Swedroe in particular was advising total return investing and not dividend investing for that as well as other reasons. I'd have to look for those articles.
Negative 4.4 returns for small caps for 7 years in a row. Takes some cajones to make that call. Setting a reminder for 2021.
Yeah, that's quite a forecast. It would be much easier to gloss over that forecast if it was made by Harry Dent, Dr. Doom (Marc Faber) or Peter Schiff.
But Jeremy Grantham and GMO should not be glossed over so easily.
I can only imagine a portfolio constructed on the basis of that forecast.
Let's see now.......how should that portfolio be constructed? Let's keep it very simple.
35% Emerging market stocks 30% US High quality stocks 15% Emerging market bonds 10% Developed small international stocks 10% Developed large international stocks
In you're in that portfolio, better hope the US dollar does not strengthen!
thanks mrdarcey. I'll have to take a look at those. I believe there have been some articles this year, possibly one by Larry Swedroe, saying that dividends were getting quite popular and therefore expensive.....so that the P/E ratios on some of the dividend exchange traded funds was too high. Swedroe in particular was advising total return investing and not dividend investing for that as well as other reasons. I'd have to look for those articles.
I've seen Swedroe make the point that it shouldn't matter towards cap gains if you take dividends out or not and sort of poo poo DRIPing. Basically telling investors to create their own dividends by selling a %age of gains. But the thought is supposed to be that dividends and low payout ratios (and to some extent buybacks) impose some restraint on corporate misbehavior, and that only high quality firms can afford to continually restrain themselves by returning profits. You've probably seen the same things I have there. Some valuations seem stretched, but these are maybe companies people are willing to pay up a little for.
Yeah, MOAT sounds interesting to me. Combination of a wide moat plus attractively priced. Sounds like a winning combination. And actively managed by the Morningstar stock analyst team.
Keep in mind, that's real-return, so they are assuming something like 2.5% inflation. Which means something around -1.5 to -2% a year going forward.
Still need substantially sized cajones to make the call ANY mainstream asset class is going to on average yield negative returns for 7 years. I don't think even Hussman is saying that, and he is already in the dog house for the rest of this century!
My point, we need to applaud the true visionaries and/or need to verify if Grantham is also a BS artist. 7 years. I hope to be alive. I hope to remember to check.
My point, we need to applaud the true visionaries and/or need to verify if Grantham is also a BS artist. 7 years. I hope to be alive. I hope to remember to check.
Might I suggest a place on MFO where we can keep significant forecasts, by serious market pundits, with a calendar and reminder attached?
That way we can keep track of these forecasts and remember to check their accuracy, and keep a permanent record of the accuracy of various pundits.
When GMO refers to 7-year forecasts, they are definitely not suggesting that this change will happen for seven years in a row. On the contrary, they are very clear that they never make short-term forecasts.
So what they are saying is that seven years from now, after accounting for 2.2% inflation, the value of each of these asset classes will be as if it had risen/fallen by this percent each of the seven years. They don't claim to know if it will do this in a straight line or on a roller-coaster.
Keep in mind, that's real-return, so they are assuming something like 2.5% inflation. Which means something around -1.5 to -2% a year going forward.
Still need substantially sized cajones to make the call ANY mainstream asset class is going to on average yield negative returns for 7 years. I don't think even Hussman is saying that, and he is already in the dog house for the rest of this century!
My point, we need to applaud the true visionaries and/or need to verify if Grantham is also a BS artist. 7 years. I hope to be alive. I hope to remember to check.
Hello,
I think you really meant "cojones"
Anyway, I don't think they mean uniformly but on average or compounded. We will see. I am not going to make any changes based on these predictions. I take these predictions with a grain of salt.
What is more interesting to me is the timber. It has the highest expected return. Now, if timber is in such a demand and everybody gets into timber business we can get another real estate like bubble or timber mania (like tulip bubble). For timber to be so much in demand we should either have a construction boom again.
When GMO refers to 7-year forecasts, they are definitely not suggesting that this change will happen for seven years in a row. On the contrary, they are very clear that they never make short-term forecasts.
So what they are saying is that seven years from now, after accounting for 2.2% inflation, the value of each of these asset classes will be as if it had risen/fallen by this percent each of the seven years. They don't claim to know if it will do this in a straight line or on a roller-coaster.
Certainly. It's an annualized real return forecast over 7 years. So if they are correct, then 7 years from now we would find the average annualized 7 year return figures to be close to what they stated. No need to even look at it for 7 years, because nothing is implied for this year or next year or the next.
Fayez Sarofim is a ginormous holder of Kinder Morgan shares and serves on the board. Probably having a good week.
This is the worse example of hijacking a thread I have ever seen
Well, maybe it's the worst, but that's a different debate.
I thought it was interesting that a manager of a particular mutual fund - whose paper was mentioned in the discussion above - is an enormously wealthy individual (http://en.wikipedia.org/wiki/Fayez_Sarofim) who is on the board of the third largest energy-related company in the United States and who owns 22,789,655 shares. Almost a billion dollars in one particular company. Wasn't aware he was a manager on a fund.
In the 'Portfolio' area for each fund on M*, the Premium screen shows moat ratings (wide, narrow, none) for the fund's portfolio. The usual suspects (PRBLX, VDIGX, etc.) show up as high scorers in the moat department. I'm not sure that exactly translates to GMO's 'high quality,' but it's at least in the ballpark.
Comments
from "US Large"? What are specific mutual funds and exchange traded funds that would correctly fit into the category of "US High Quality" per the GMO chart?
Inker defined a high-quality stock as one that has high profitability throughout an economic cycle, stable profitability and low debt. Some such high-quality stocks are trading at a lower price-earnings ratio than the broad market is, so investors can obtain them at a discount, he noted.
August 2013:Investors Should Buy Quality Stocks, Not Hide in Cash
http://www.moneynews.com/InvestingAnalysis/Inker-quality-stocks-cash/2013/08/01/id/518161/
And for an article with greater detail, see:
March 2004:The Case for Quality – The Danger of Junk
http://thetaoofwealth.files.wordpress.com/2012/08/the-case-for-quality-the-danger-of-junk.pdf
QUAL
http://etfdb.com/2013/ishares-launches-msci-usa-quality-factor-etf-qual/
ETFdb:
The iShares fund takes a factor-based approach in trimming down the starting universe by employing a series of fundamental metrics screens to narrow down only the highest-quality of companies.
The methodology behind QUAL is based on three metrics of quality: high return on equity, stable year-over-year EPS growth, as well as low debt-to-equity.
SPHQ
https://www.invesco.com/portal/site/us/financial-professional/etfs/product-detail?productId=SPHQ
Powershares:
The [ETF is based on an] Index [that] is designed to provide exposure to the constituents of the S&P 500 Index that are identified as stocks reflecting long-term growth and stability of a company's earnings and dividends.
DREYFUS: The Case For High Quality Stocks
https://public.dreyfus.com/documents/manual/perspectives/dry-fsiiqwp.pdf
and
S&P: S&P 500 High Quality Rankings Index
http://us.spindices.com/indices/strategy/sp-500-high-quality-rankings-index
and
QVM GROUP: High and Low Quality Stocks Beat the S&P 500
http://qvmgroup.com/invest/2013/06/12/high-and-low-quality-stocks-beat-the-sp-500/
and
FAYEZ SAROFIM & CO: Investing in Quality Companies
https://www.sarofim.com/assets/white papers/sarofim-quality-white-paper-2014.pdf
[Manager of Dreyfus Appreciation Fund]
and
SEEKING ALPHA CONTRIBUTOR: What is Quality in a stock?
http://seekingalpha.com/article/2163323-what-is-quality-in-a-stock
[Broad based discussion, includes Morningstar screen]
Now I need to read those links
But Jeremy Grantham and GMO should not be glossed over so easily.
I can only imagine a portfolio constructed on the basis of that forecast.
Let's see now.......how should that portfolio be constructed? Let's keep it very simple.
35% Emerging market stocks
30% US High quality stocks
15% Emerging market bonds
10% Developed small international stocks
10% Developed large international stocks
In you're in that portfolio, better hope the US dollar does not strengthen!
Forgot to add M*'s wide-moat index, MOAT. Keep in mind, that's real-return, so they are assuming something like 2.5% inflation. Which means something around -1.5 to -2% a year going forward.
My point, we need to applaud the true visionaries and/or need to verify if Grantham is also a BS artist. 7 years. I hope to be alive. I hope to remember to check.
So what they are saying is that seven years from now, after accounting for 2.2% inflation, the value of each of these asset classes will be as if it had risen/fallen by this percent each of the seven years. They don't claim to know if it will do this in a straight line or on a roller-coaster.
I think you really meant "cojones"
Anyway, I don't think they mean uniformly but on average or compounded. We will see. I am not going to make any changes based on these predictions. I take these predictions with a grain of salt.
What is more interesting to me is the timber. It has the highest expected return. Now, if timber is in such a demand and everybody gets into timber business we can get another real estate like bubble or timber mania (like tulip bubble). For timber to be so much in demand we should either have a construction boom again.
It's an annualized real return forecast over 7 years.
So if they are correct, then 7 years from now we would find the average annualized 7 year return figures to be close to what they stated. No need to even look at it for 7 years, because nothing is implied for this year or next year or the next.
I thought it was interesting that a manager of a particular mutual fund - whose paper was mentioned in the discussion above - is an enormously wealthy individual (http://en.wikipedia.org/wiki/Fayez_Sarofim) who is on the board of the third largest energy-related company in the United States and who owns 22,789,655 shares. Almost a billion dollars in one particular company. Wasn't aware he was a manager on a fund.
Meh. Just going to post less on here.