GMO Quarterly Letter | 3Q 2014

Is This Purgatory, Or Is It Hell?

Executive Summary

In 2013, James Montier wrote about the current opportunity set for investors and referred to it as the “Purgatory of Low Returns.” He called it Purgatory on the grounds that we assume it is a temporary state and higher returns will be available at some point in the future. But as we look out the windshield ahead of us today, it is becoming clearer that Purgatory is only one of the roads ahead of us. The other one offers less short-term pain, but no prospect of meaningful improvement as far as the eye can see.

The two paths not only differ in their implications for the long-term returns to financial assets, but also in the appropriate portfolio to hold today and into the future. If we are in Hell, the traditional 65% stock/35% bond portfolio actually makes a good deal of sense today, although that portfolio should be expected to make several percentage points less than we have all been conditioned to expect. If we are in Purgatory, neither stocks nor bonds are attractive enough to justify those weights, and depending on the breadth of your opportunity set, now is a time to look for some more targeted and/or obscure ways to get paid for taking risk or, failing that, to reduce allocations to both stocks and bonds and raise cash.

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Disclaimer: The views expressed are the views of Ben Inker through the period ending November 2014, 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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