GMO’s 7 year asset class forecasts: US less attractive than international (but neither are very impressive)

GMO recently released its 7 year asset class return forecasts, and I think they’re extremely interesting. Jeremy Grantham, who is chairman of GMO, is close to God-Status in my book because his views are always well thought-out and detail-oriented, so even when I don’t agree with him I can follow his logic and evaluate how he comes to his conclusions. You can find GMO’s published piece on their website (which requires registration) at: http://www.gmo.com/America/

My bottom line takeaway from GMO’s forecasts are simple: I agree that US equity and bond returns will most likely underperform international and emerging market returns. I also agree that active management will probably produce a slight benefit over that period, as deep-dive analysis will be more valuable given the uncertain macro situation and uncertainty about the equity markets overall. I’d point out that these forecasts are “real returns” which means they are net of the negative impact from inflation on real-world gains in value/wealth.

I heard about the forecasts from Scott’s Investments, a blog I check frequently. Their post is here: http://scottsinvestments.blogspot.com/2009/12/gmo-7-year-asset-class-forecasts.html and they note that:

Real return forecasts before any extra returns gained from active management (estimated returns with active management listed in parenthesis). Compare these results to previous months I’ve posted on my blog (search ‘GMO’ on the blog) and you will see projections continue to decrease. Where is an investor to seek long term returns in this type of environment?

Equities
Large Cap US: 1.6% (3.4%)
Small Cap US: 1.7% (3.5%)
US High Quality: 7.8% (9.6%)
Large International: 5.5% (7.8%)
Small International: 5.4% (7.7%)
Emerging: 4.4% (8.1%)

Bonds
US Govt: .7% (1.6%)
Intl Govt: .2% (1.1%)
Emerging: 2.1% (5.0%)
Inflation Indexed: .8% (1.7%)
US Treasury (30 days to 2yrs): -.5% (.9%)

Other
Managed Timber: 6% (7.5%)