(PUB) Investing 2015

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Asset Forecasts See Meager Returns The Contrarian | Russel Kinnel

The thing that jumps out about GMO ’s figures is just how downbeat the firm is about a number of core asset classes. GMO projects losses for U.S. large caps, U.S. small caps, U.S. bonds, international hedged bonds, and cash. Ouch. So, what looks good? Well, U.S. high quality, foreign equity, emerging- markets equity, and emerging-markets debt all have positive though modest return projections. ( GMO also likes timber, though there aren’t many avenues for individual investors to go on that one.) Research Affiliates produces a graph showing 10 - year real-return and volatility forecasts. The clear winner in its forecasts are emerging-markets assets of all stripes. Emerging-markets stocks are projected to return 6 . 3% annualized, only with the greatest volatility of any asset class. Emerging-markets local- currency debt is projected to have a 4 . 7% return with more-modest volatility, while emerging-markets currencies are projected to have 4 . 4% returns with even less volatility. a 3 . 9% return, albeit with a fair amount of volatility. Commodities and alternatives figure in the 2% – 3% annualized returns band, while U.S. large caps have a miserable 1% return and U.S. small caps a 0% return with very high volatility. Long-term Treasuries are projected to have a 0 . 7% return with significant volatility, while short-term Treasuries will have a miserable 0 . 1% annualized 10 -year return. œ Foreign equity in developed markets as measured by the MSCI EAFE Index is expected to have

Two of the better forecasters out there are GMO and Research Affiliates. Lately, GMO has been a little more on target, though both have favored emerging markets over the United States. I wouldn’t suggest remaking your portfolio based on either firm’s fore- casts, but I think it helps to understand the lay of the land and figure good landing spots for your next investment. I’ve included a table of each firm’s forecasts and their actual allocations in portfolios with the widest discretion. Let’s start with GMO . It does seven-year real-return forecasts for asset classes. Real returns mean that inflation has been subtracted. In predicting annual- ized returns over seven years, GMO is careful to note that these are not risk-adjusted returns. So, its asset- allocation portfolios will generally have less in higher- risk and more in lower-risk assets than the raw return number might suggest. See the table for each firm’s forecasts.

Our Contrarian Approach I go against the grain to find overlooked funds that may be ready to rally.

Research Affiliates 10-Yr Forecast %

GMO 7-Yr Forecast %

Two Bold Forecasts

U.S. Large Caps

-1.70

0.70

U.S. High Quality

1.50

U.S. Small Caps

-2.90 1.90 2.10 3.80

0.00 3.90

EAFE Equity

Foreign Small

Emerging-Markets Equity

6.30 2.70 1.00 1.10 0.70 0.10 2.10 4.70

Commodities

U.S. Core Bonds

-0.30

U.S. TIPS

0.00

Long-Term Treasuries

Short-Term Treasuries

-0.30

High Yield

Emerging-Markets Bonds

2.10

Alternatives 2.40 Note: Figures are annualized. GMO’s figures subtract inflation. GMO’s forecast is as of Nov. 30, 2014, and Research Affiliates’ is as of Sept. 30, 2014.