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    GMO Asset Class Return Forecast

    GMO is a well respected global asset management company started by Jeremy Grantham, Richard Mayo, and Eyk Van Otterloo in 1977. The firm has grown substantially, and during 2005 their assets under management exceeded $100bn. Of the three founders Grantham is the only one left who is still actively involved in making investment decisions.

    Yesterday we wrote about investment time horizons and that investors generally need to have long term time horizons. GMO are experts at taking long term investment decisions. Their decisions are based on what the various asset class real return outlooks are for the following 7 years. This view gets updated monthly, and implemented in their portfolios according. Their predictions have proved to be remarkably accurate. For instance in June 2000 GMO’s real return outlook for US large cap shares over the following 10 years was -2% pa. This number was scoffed at as a highly bearish forecast by many investment professionals. The S&P 500 ended June 2000 at 1,455, and is now (nine and a quarter years later) at 1,095, an annualised return of -3% (excluding dividends) in nominal terms (excluding the effects of inflation).

    Equally at the height of the recent crisis when asset prices were falling through the floor at the beginning of the year GMO came out at the end of February and said that their outlook for US large cap shares was a real 8.9% per annum over the following seven years. It is important to realise that these returns won’t necessarily come in a straight line, but if you hold your assets over a full cycle you should get a better indication of what your return over the total period should be. The S&P 500 is up almost 50% since this forecast and it is reasonable to believe that GMO’s return expectations going forward have been lowered.

    Here is an extract of the chart of their latest 7 year real return outlook at the end of September. The full copy can be downloaded from their website http://www.gmo.com/Europe/MyHome/.

    From the chart you will notice that apart from high quality US stocks all other asset classes are expected to produce muted returns going forward. Government issued paper in particular is looking expensive. This forecast doesn’t preclude asset prices going higher from here, but it does indicate that the real returns from most asset classes over the longer term will be disappointing.

    Enjoy your evening.

    Take care,

    Mike Browne
    021 9144 966

    Permalink2009-10-20, 17:29:54, by Mike Email , 2 comments
    Trackback address for this post: http://blog.sharenet.co.za/htsrv/trackback.php/1504

    Comments, Trackbacks:

    Comment from: Kim Henry [Visitor] Email
    Well, if "the real returns from most asset classes over the longer term will be disappointing," as the author suggest, in what shall we invest? Should we just sit on cash?
    PermalinkPermalink 2010-01-11 @ 03:35
    Comment from: Mike [Member] Email
    Hi Kim,

    As you will see from GMO's chart, while the real expected returns from growth assets (equities) are below their long term average they are still above cash returns. There is therefore some merit in remaining partially invested.

    Circumstances do change, and so while sitting on cash over the short term can be tolerated, investors must realise that there will become a point when more risk needs to be taken. Sitting in cash indefinitely is the surest way do destroy real wealth.

    I trust that this helps. If you have anymore questions please don't hesitate to contact us on the email address above.

    Kind regards,
    PermalinkPermalink 2010-01-11 @ 09:26

    This post has 4 feedbacks awaiting moderation...

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