12 / 772
10
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.
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.
Foreign equity in developed markets as measured
by the
MSCI
EAFE
Index is expected to have
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
Asset Forecasts See Meager Returns
The Contrarian
|
Russel Kinnel
Our Contrarian Approach
I go against the grain to find
overlooked funds that may be
ready to rally.
Two Bold Forecasts
GMO 7-Yr
Forecast %
Research
Affiliates 10-Yr
Forecast %
U.S. Large Caps
-1.70
0.70
U.S. High Quality
1.50
U.S. Small Caps
-2.90
0.00
EAFE Equity
1.90
3.90
Foreign Small
2.10
Emerging-Markets Equity
3.80
6.30
Commodities
2.70
U.S. Core Bonds
-0.30
1.00
U.S. TIPS
0.00
1.10
Long-Term Treasuries
0.70
Short-Term Treasuries
-0.30
0.10
High Yield
2.10
Emerging-Markets Bonds
2.10
4.70
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.