GMO Forecasts Gloomy Returns

Date: Tuesday, February 6, 2007
Author: Pensions Weekly

Foundations and endowments will have a difficult time matching last year's strong returns because all sectors of the equity market have become overvalued. "We have not seen such a flat line across all equities in about 20 years," said Ben Inker, cio & director of asset allocation for GMO. "All the asset classes within equities are universally depressing." Even old reliable return generators such as alternatives and emerging markets might not be saviors this year, Inker added, because they are also overvalued. "Taking on more risk is not going to help you," he said. "If you aren't in alternatives yet, right now might not be the time to do so."

Foundations and endowments had a stellar performance year in 2006, returning a median of 14.3%, according to Northern Trust. While Inker noted that endowments have proved more adept at finding alpha than other institutions, alpha could be in short supply in 2007. Inker said this year is not "going to be a bloodbath, we're just saying nothing is going to happen." GMO recommends playing it safe; Inker suggested investing in Treasury inflation-protected securities for protection against rising inflation. Timber and high quality blue chip stocks could also deliver modest gains.

Lou Morrell, v.p. of investments at Wake Forest University, described Inker's assessment of the market as "a sobering rejection of 2007." But another conference attendee, who asked not to be named, scoffed at Inker's predictions. "GMO is always really dour," he said. "They delivered the same predictions four years ago."

In the final address of the conference, Michael Metz, chief investment strategist for Oppenheimer & Co., urged caution about all the money that has flowed into hedge funds. "I think this love for alternatives will not come to a happy end," he said. "The risk of a major financial accident is increasing every year." He argued that lower returns have increased the use of leverage by managers which has in turn increased risk.