Forecasts & Portfolios

Presenters

Catherine LeGraw

Overview

GMO’s Asset Allocation team is forecasting low absolute stock and bond returns today. However, capital markets are providing the best relative return opportunities in over 20 years, which provides tremendous potential to outperform the traditional 60/40 portfolio. In particular, the dislocation between growth and value equities, pushing growth stocks into bubble territory, allows for numerous ways to position portfolios to benefit in this environment.

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Potential to outperform a traditional, balanced portfolio is better than we’ve seen in 20 years

As of 9/30/2021 | Source: GMO
Opportunity is difference between forecast return of portfolio and benchmark given GMO forecasts at the time. 10-year forecasts are translated to ‘7-year equivalent’ by multiplying by 10/7. Benchmark-Free Asset Allocation is compared to a 60% MSCI ACWI / 40% Bloomberg U.S. Aggregate portfolio.

Key Points

We identified three ways to profit from the growth stock bubble:

  • Exploit: Our most aggressive approach, GMO is fully exploiting the value-growth dislocation through an absolute return long/short strategy which uses GMO’s proprietary value models to build a portfolio of long and short equities at extreme valuations. This is GMO’s biggest single bet across Asset Allocation portfolios and many clients have chosen to invest directly in the aptly named Equity Dislocation Strategy.
  • Avoid: In many portfolios we simply avoid the bubble in growth stocks. We built a series of liquid alternative strategies that limit beta and look to provide investors with a solid risk-adjusted alpha stream. Investors can also avoid a bubble in stocks by allocating smartly to bonds. Due to low rates and tight spreads, we recommend focusing on alpha potential rather than traditional exposures.
  • Concentrate: To the extent investors want to allocate to equities, we recommend concentrating the portfolio in the cheapest value areas. We identified specific pockets of the equity markets that are trading at attractive valuations and have intriguing features, which include Resource equities, Emerging ex-China, Japan Value, Climate Change equities, and Quality Cyclicals.

Concentrate: Finding cheap pockets of STOCKS

Valuation Discount to ACWI (Price / Forward Earnings*)

As of 9/30/2021 | Source: GMO
*Forward 1-year weighted median. Based on the characteristics of GMO strategies.

Related Strategies

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Disclaimer: The views expressed are through the period ending November 2021, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.
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