Here's the latest projection from GMO. Not even high quality US Stocks rate a positive real return.
Link to GMO Forecast@ InformalEconomist . For those without a log in (its free to get one), here are the "not so pretty" annual real return forecasts as of July 31, 2015:
Stocks
US Large -2.0%
US Small -2.0%
US High Quality 0.0%
Intl Large -0.5%
Intl Small -1.1%
Emerging 3.2%
Bonds
US Bond -0.9%
Intl Bonds Hedged -2.8%
Emerging Debt 2.1%
US Inflation Linked Bonds 0.0%
US Cash -0.3%
Timber 4.8%
Comments
Possible to provide a link that doesn't require a login?
Or perhaps just note which asset classes might not drown as badly as others, in GMO's forecast?
Thanks.
Have a good one , Derf
Looking at timber investment vehicles, there are two ETFs (WOOD, CUT) and a few stocks (RYN, PCL, WY, PCH). None of these look attractive to me.
CHART
Kevin
http://www.futuresbuzz.com/lumberlt.html
So here's GMO putting their money where their mouth is:
1. equities comprise 40% of the portfolio.
2. the regional equity weighting is 43% emerging, 24% US, 15% Europe, 10% UK.
3. the fund holds about 10% in cash and 7% in a market-neutral strategy that they treat as part of the cash (i.e., stability) allocation.
4. about 14% is invested in alternative strategies, largely because the equity opportunity set is so uninspiring.
5. about 30% is fixed income, which includes a short position on the Euro plus exposure to e.m. debt and asset-backed securities. In general, they're positioned for rising rates, particularly in Europe.
The strategy is manifested in GMO funds with $100 million minimums and, imperfectly, in Wells Fargo Absolute Return (WARAX).
For what interest that holds,
David
http://www.morningstar.com/funds/XNAS/GBMFX/quote.html
I do believe that the GMO crew is a talented and skillful group of active investors.
Yet, I’m often puzzled by their 7-year forecasting releases. As a general observation, their forecasts frequently project various asset class returns that seem to depart from historical correlations between these elements.
A terrific illustration of this disconnect is the current projected poor returns for various equity components, and the estimated superior returns for emerging markets and timber.
It seems to me that emerging market and timber returns should be rather tightly and positively correlated with the core US equity markets. If the US markets suffer, so should emerging markets and timber who rely on large, profitable US customers.
Historical correlations support this close, interconnected dependency. I used the Portfolio Visualizer website to explore the correlation coefficients for representatives of three pertinent asset classes.
I used the Vanguard 500 Index fund (VFINX), the Vanguard Emerging Markets Stock Index fund (VEIEX), and the ishares S&P Global Timber & Forestry Index fund ETF (WOOD) as surrogates for the three classes. I looked at their returns and correlation coefficients based on monthly data starting on 07/01/2008. That’s the complete database accessible on the Portfolio Visualizer site for all three products.
During this period, the VFINX delivered the highest annualized returns with the smallest standard deviation by a factor of two. The VFINX return was 9.42%, the VEIEX return was 0.89%, and the WOOD return was 3.33% annually.
During this same period, the VEIEX and the WOOD correlations to the VFINX product were 0.84 and 0.88, respectively. These three asset classes were in close march-step for this extended period.
This brief analyses reinforces my bafflement over the GMO forecast. Their current forecast is certainly a major departure from the way these classes have performed over the last 7 years.
Does GMO explain the basis for the present predictions in their documentation?
Best Wishes.
Here is what I posted previously in the same forum a few years ago.
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They have very good track record indeed, starting from predicting bull run in 1982.
Grantham predicted the following, all the based on reversal to the mean
- In 1982, he said U.S. market was ripe for a "major rally."
- In 1989, he correctly called the top of the Japanese economy.
- In January 2000, he warned of an impending crash in tech stocks which took place two months later.
- In April 2007, Grantham said we are now seeing the first worldwide bubble in history covering all asset classes.
- They also predicted the outperformance of many of the asset classes that were cheap in 2001, REIT, Smallcap value, Emergin Market, etc.
GMO's predictions are based on the idea that profit margins and price-earnings ratios are mean-reverting over a period of years. Here is the link to Duke University professor Edward Tower' study on their predictions
http://public.econ.duke.edu/Papers//PDF/GMO_Predictions1.pdf
In fact, Mr. Tower participated in the discussions with Boglesheads in Diehard forum at M* after he published this research.
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https://www.cxoadvisory.com/3200/individual-gurus/jeremy-grantham/
http://www.forbes.com/sites/schifrin/2012/10/24/jeremy-grantham-warns-2013-will-be-a-dangerous-year-for-stocks/
Grantham "right" about many turns in the market, but he himself did not have conviction in his research? If he did, he would have made more money for investors.
Not disrespecting Grantham. Just saying writing research paper, and talking on TV is one thing. Making money for investors is another.
Uhhh .... 10 year growth of $10,000. GBMFX: $19,000. World allocation group: $14,000. Over 5 years, $13.2k to $12.7k. Over one- and three-year periods, essentially a tie. Add in volatility measures, and GMO clubs its peer group: the downside capture is about one-half of its peers while upside capture is about 80% of it. Vastly higher five- and ten-year Sharpe and Sortino ratios, lower S.D.
None of which answers the question, should we judge funds based on ill-fitting Morningstar categories? Morningstar's ratings are reliable only if you invest in a fund that invests very much like the herd which defines the peer group norms; as soon as you find someone who acts independently, you (a) need help assessing what's going on and (b) you find the Morningstar ratings become useless. Hence the fund with the industry's highest Sharpe ratio, which measures risk-adjusted performance, ends up as a one-star pariah.
Off to the Iowa State Fair and our annual celebration of food-on-a-stick. I'll have a deep-fried brownie and think of you all while I wait for the EMTs to arrive.
David
Investors often ask two questions when assessing a forecast. What is their historical accuracy record? What have they done for us lately?
Those questions are definitely appropriate for the GMO 7-year forecasts. The original references to Professor Edward Tower’s work are somewhat dated. An update would be beneficial. How do the forecasts align with reality?
Here is a Link to a GMO forecast summary from The Economist titled “The View from GMO”:
http://www.economist.com/blogs/buttonwood/2013/09/investing-0
Please examine the Table in that article that compares forecasted real returns against actual outcomes. The author concludes that “While there was clearly a pessimistic bias to the forecasts, the direction of their guesses was remarkably accurate.”
I concur. In general, GMO overestimated losses for expected negative markets, and underestimated gains for projected positive markets. GMO’s directional projections were very prescience. When making predictions, precision is a daunting challenge. Hooray for GMO.
But what have they done for us lately? Professor Tower has updated his review of the GMO 7-year forecast project. Here is a Link to one of his presentations that compared equivalent GMO and Vanguard funds:
http://public.econ.duke.edu/Papers//Other/Tower/GMO_Versus_Vanguard.docx
The basic takeaway from the referenced article according to Tower is that “ On average, GMO’s claim of the superiority of its managed funds to Index performance has carried over to outperforming Vanguard during the first half of the most recent ten year period. Over the second half it has not.”
So, has GMO lost its market mojo? Probably not. It is simply the Iron Rule of regression-to-the-mean exercising its persistent power. When forecasting you win some and you lose some. In the end, it’s a coin toss. Apparently GMO also subscribes to the Regression Iron Rule since that is one of the factors in their 7-year forecasting model.
The GMO forecasts are full of data and informative. But beware. Larry Swedroe’s tenth simple investment truth is that “The forecasts of market strategists and analysis have no value, except as entertainment”. That’s likely an overstatement, but it does capture some fundamental wisdom based on practical experience and formal studies.
I hope this posting and the references help.
Best Wishes.
Could not agree more albeit so many hang on every pearl of folly out of their mouths and base their investment decisions thereof.
Thank you for your question. Larry Swedroe has actually generated a list of 14 investment Truths. I was just quoting Number 10 from that set.
His list appeared in a book he authored a few years ago. The title of the book is “The Successful Investor Today: 14 Simple Truths You Must Know When You Invest”.
But you need not buy the book. The List is accessible from many sources. Here is one from The Street website that not only provides the 14 Truths, but also offers a rather lengthy commentary of each Truth:
http://www.thestreet.com/story/10108607/1/the-truth-about-the-stock-market.html
Enjoy. I keep the Swedroe List nearby with other noteworthy investor lists. They all differ somewhat, but all have many common elements. It’s not rocket science.
Best Wishes.