Grantham/GMO 7-Year Asset Class Forecast

Jeremy Grantham is the head of GMO, an institutional asset management company that has more than $100 billion dollars under management. According to Wikipedia, he started one of the first index funds? He’s built a reputation as a market genius, with stories of successfully avoiding the Japanese bubble, the Dot-com bubble, and the most recent Credit Crisis. Of course, sometimes he was very early and people lost a lot of money trying to follow him.

Every quarter, GMO releases a 7-Year Asset Class Forecast. You can read it and other market commentary for free by registering on their website. I wouldn’t call looking ahead 7 years a “long” time horizon, but since I’ve exploring future market returns, I figured why not throw it out there for future reference. Here’s the latest forecast as of April 30th, 2010. (Click to enlarge.)

The chart represents real return forecast for several asset classes and an estimate of net value expected to be added from active management. These forecasts are forward-looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Actual results may differ materially from the forecasts above.

GMO expects the High Quality US stock, Emerging Markets stock, and Managed Timber asset classes to have the highest real return over the next 7 years. I pretty much ignore the value-added part (“alpha”) because even if I believed it, GMO won’t manage my money for me anyway. :P

Comments

  1. I work with institutional investors every day and the GMO letter is a must read.

    If you go back and look at his letters from 2007 on, he was eerily prescient on almost everything that went down. His 7 year forecast from 2001 was almost dead on as to the level of the S&P at the end of 2008.

    The problem with Grantham is he tends to be a bit bearish, (As the old joke goes, Bears have correctly predicted 14 of the last 3 recessions…)

    He still believes the market is a bit over priced and the S&P should be fairly priced at about 900-950 if I recall correctly.

    That said, it is always an entertaining and fascinating read. Worth signing up for if you have interest in this sort of thing.

  2. I thought it was the economists who predicted 14 of the last 3 recessions?

  3. Ironically, I was at a financial planning seminar today and the speakers were touting these “Tactical Asset Allocation” funds. It sounded like the investment minimums were pretty high, but based on the historical results, the concept seemed very compelling. Looking at the a 15-year history of these funds, they didn’t perform as well in bull markets but trounced the indexes during the bear markets—and the total return on the funds significantly outperformed the indexes.

    Anyone have any first hand experence with these funds (GMO or otherwise)?

  4. Swensen at Yale says he doesn’t “time” the markets, but he does “price” the markets.

    There are times when a particular asset class might be over our underpriced compared to its historical averages and reversion to the mean is a pretty powerful force…

    There is something to be said for tactical asset allocation based on long-term historical averages and I believe that is what GMO preaches.
    That said, as Buffet famously quipped, the market can remain irrational longer than many investors can remain solvent. Many people can tell you WHAT should happen, it is the WHEN it will happen they have trouble with and this inability can leave your portfolio under performing for long periods of time.

  5. Read this.. Do you want physical assets that will gain value and have a real purpose?
    Investment Grade Molybdenum:

    Commodities are physical substances like grains, food and metals. An investment is the purchase of a financial product or other item of value with the expectation of favorable returns in the future.

    Well, I prefer metals for preservation of my wealth. The question is what metal would you pick to preserve your wealth? Now the next thing to keep in mind is not to be biased in any way. That is, to buy a certain metal because someone tells you to, or to buy a certain metal because it is on an upward price trend or buy a metal because you read an interesting article on it.

    #1 on my shopping list. I look at is a the ability of a metal to actually promote or enable life of plants and animals on this planet. This means that you can actually grow food with it or grow trees. You can actually use the metal by sprinkling the powderized form on your soil and let the microbes in the soil slowly break down the metal and make it available for the plants to consume. Hydroponic or Aeroponic growing of food uses about 17 life giving elements that are added to the water to give complete nutritional support for plants.

    Unfortunately, there are only 7 elements of the 17 needed for plants that are an actual “metal”. These are called transition metals. Transition metals are known for their ability to conduct electricity, their hardness, high density, malleability (a material that can be worked with or hammered into flat sheets), ductility (able to be produced into a thin wire).

    These 7 investment grade metals are Molybdenum, Cobalt, Copper, Zinc, Manganese, Iron, Nickel. Nickel is documented as a essential nutrient in some plants. Nickel is not used in some high-end hydroponic formulas.

    #2 on my shopping list. I now have 7 transition metals that are used in growing food and are capable of being in my metal portfolio. But, I only want one metal. I will now consider the amount of this metal available on Earth. The next step would be the abundance of the metal or scarcity of it. Here is a list of these 7 metals and the amount in parts per million in the Earth’s crust.

    Molybdenum 1 ppm Molybdenum is most valuable here because of scarcity

    Cobalt 25 ppm

    Copper 60 ppm

    Zinc 70 ppm

    Nickel 84 ppm

    Manganese 950 ppm
    Iron 56300 ppm

    #3 on my shopping list is the melting point. I want a metal that can withstand high working temperatures. There is something called metal “creep” and that is the expansion or deformation of metals when they start reaching temperatures near the melting point. I like metals that don’t creep or change shape in high temperature conditions eg: Jet engines, Furnaces or anywhere where safety is priority.

    Molybdenum has the highest melting point of any life giving metals. Molybdenum has the sixth highest melting point of any element on Earth, which is incredible!

    Molybdenum 4753 Degrees Fahrenheit Melting Point

    Iron 2800 Degrees Fahrenheit M.P.

    Cobalt 2723 Degrees Fahrenheit M.P.

    Nickel 2651 Degrees Fahrenheit M.P.

    Manganese 2275 Degrees Fahrenheit M.P.

    Copper 1984 Degrees Fahrenheit M.P.
    Zinc 787 Degrees Fahrenheit M.P.

    #4 on my shopping list. The metal is an investment so I Do Not want it to rust, oxidize or corrode. If this happens you can surely say goodbye to your investment. Molybdenum does not react with water or air at room temperature and will not corrode. Molybdenum will keep a beautiful lustre (silvery blue). Copper and iron are definitely OFF my shopping list in this category.

    Research this incredible metal for yourself, it has many uses.
    Carlo Biancardi (London, Ontario) April 2011

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