GMO Paper Says Indexing the S&P 500 is Risky

A comprehensive  white paper published by GMO’s Matt Kadnar and James Montier in August—arguing against a predominantly index-focused investment strategy–was condensed in a recent MarketWatch article. The article quotes the authors: “A decision to allocate to a passive S&P 500 index is to say that you are ignoring what we believe is the most important determinant of long-term returns: valuation. At this point, you are no longer entitled to refer to yourself as an investor. You may call yourself a speculator, but not an investor.” Given the market’s stretched valuations, the paper explains, passive investing prevents an investor from underweighting […]

Natural Resource Stocks that Show Promise

The short-term volatility in natural resource stocks can leave investors skittish, especially given their movement with either commodity or equity markets. But Jeremy Grantham and Lucas White of global investment management firm GMO published a white paper that offers some arguments in favor of including this asset class in a balanced portfolio: Growing demand and finite supply of natural resources; Diversification they can provide, as evidenced by low correlations with broader markets over long periods; Over 10-year periods, commodity producers have rarely delivered negative returns; The premium associated with equity investing versus direct purchase of raw materials; Equities provide an […]

GMO: Don’t Bail on Hedge Funds

The fall in rates since the financial crisis has benefited stocks and other long-duration assets while hurting short-duration assets such as hedge funds, says GMO’s Ben Inker. “The characteristics that made hedge funds disappoint,” he says, “may well prove a blessing if discount rates start to rise.” Inker argues that today’s high returns and advanced U.S. equity valuations are not sustainable because they “represent an increase in the present value of an asset without any increase to the cash flows to the asset class.” So while the present values have risen, he says, future values have not. He contends that […]

Curb Your Enthusiasm

Richard Turnill, BlackRock’s chief global investment strategist, advises investors to “curb their enthusiasm.”  Turnhill commented in BlackRock’s most recent weekly market commentary: “We see a global portfolio made up of 60% equities and 40% fixed income producing annual returns of just 3.3% in U.S. dollars before inflation over the next five years.” Turnhill speaks well of foreign stocks, emerging market stocks, and private equity, saying “our international equity return estimates are now above the long-term average, thanks to improved valuations outside of the U.S.” GMO presents a similar picture, warning “you’re going to be disappointed in the next seven years.” […]

Is Long-Term Forecasting Valuable?

A Financial Times article highlights and challenges the common practice of long-term forecasting. Opening with a George Eliot quote – “Among all forms of mistake, prophesy is the most gratuitous” – the piece makes no bones about challenging the value of long-term forecasts. It argues: “Either they are so short term they are often liable to be as wrong as any other prediction; or they are so long-run that they are practically useless and only show the long-term historical returns.” Nonetheless, recent forecasts of GMO and JPMorgan Asset Management’s “long-term capital markets assumptions” (LTCMA). As depicted in the images below, […]

GMO: Death of Equities “Greatly Exaggerated”

Bill Gross’ claim that the cult of equities is “dead” has generated a lot of response recently, and now Jeremy Grantham’s GMO has entered the fray, countering many of Gross’ key points. “Disappointing returns from equity markets over a period of time should not be viewed as a signal of the ‘death of equities,’” Ben Inker writes in a white paper on GMO’s web site. “Such losses are necessary for overpriced equity markets to revert to sustainable levels, and are therefore a necessary condition for the long-term return to equities to be stable.” While Gross has said that stock market […]

GMO High on Quality & Value, Sour on Bonds

Jeremy Grantham’s GMO has published its fourth-quarter update, offering a contrarian position on Europe and outlining its strategies as we head into 2012. The firm says it moved “incrementally into Europe” in the fourth quarter of 2011, adding. “Selectively, slowly, prudently, of course, but the general belief is that markets have overreacted, and this always presents some opportunities.” GMO says the move was “by no means a ‘call’ on the bottom of possible European corrections or crises, but valuations are such that bad scenarios are already baked into some prices.” Some highlights of the firm’s strategy heading into 2012: Wary […]

GMO: International Equities Promising, Govt. Bonds Dangerous

Jeremy Grantham’s GMO has released its first-quarter 2009 update, and the firm says it will continue to put money back into equities, though with a cautious approach. “Having increased our exposure to equities last quarter, we kept to our game plan and gingerly shifted our stance toward favoring riskier asset classes,” GMO states. “Our concern about the broader economic picture, however, prevented us from deploying toward more speculative areas of the market, and we did not stray far from U.S. high-quality stocks.” Now, Grantham’s firm says its recent push into U.S. high-quality stocks will “probably represent the apex of our […]