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4Q 2018 GMO Quarterly Letter

By Ben Inker and John Thorndike

GMO Quarterly Letter

4Q 2018

And the Winner Was…T-Bills?

By Ben Inker

Executive Summary

2018 was a lousy year for almost all assets, with no major asset class around the world able to keep pace with U.S. Treasury Bills. The poor returns were not driven by any economic calamity, but by markets coming into the year with unrealistic and incompatible expectations, which wound up being generally disappointed. The poor returns have a silver lining, however, in that today a number of asset classes are priced at levels that embody much more achievable expectations and decent longterm returns. In general, it looks to be the best opportunity set we have seen since 2009. This means it is reasonably straightforward to put together a diversified portfolio priced to achieve something close to +5% real return. But as U.S. equities and nominal government bonds are not among the appealing assets, we believe the portfolio you should own today looks more or less nothing like a traditional 60% stock/40% bond portfolio.


Liquid Alts: Rising to the Occasion

By John Thorndike

Executive Summary

  • In the years following the Global Financial Crisis, liquid alternative investment strategies[1] have failed to match their pre-crisis performance.
  • Post-crisis returns have been dragged down by negative real (i.e., after inflation) cash yields, but this drag has likely been eliminated thanks to recent interest rate hikes by the Federal Reserve.
  • Buoyed by short-term rates above expected rates of inflation, liquid alts now look poised to deliver attractive real returns and outperform developed equity markets in the coming years.
  • Investors who redeem from alts today are exhibiting the classic investor behavior of selling out as the opportunity set improves.
  • Considering the risks and perceived opportunities of GMO’s alternatives strategies, we believe the alts in our asset allocation portfolios have the potential to deliver 5% real returns.
  • The improved prospects for alts and the attractive prices of emerging market value stocks indicate that our portfolios may be well positioned to outperform traditional balanced portfolios.
  • While the 5% real return target sought by many institutional investors will likely remain a challenging bogey for diversified portfolios in the coming years, we are increasingly optimistic about our portfolios’ prospects for delivering 5% real.

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Disclaimer: The views expressed are the views of Ben Inker and John Thorndike through the period ending January 2019, 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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