MutualFundWire.com: Gross vs. Grantham on Stocks

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Monday, August 13, 2012

Gross vs. Grantham on Stocks

Bill Gross' stock-bashing August newsletter, in which he declares equities "dead," has faced criticism from others in the industry, writes Steven Russolillo of the Wall Street Journal.

Ben Inker, head of the asset allocation group at GMO, even wrote a detailed paper in response, arguing that stocks can still offer a strong return.

“Equities are an ugly asset class — one that is more likely than almost any other to lose investors a significant amount of money at the times when they can least afford it," Inker said. "That is, in a way, their charm.”

Neel Kashkari, Pimco's head of equities, echoed his boss' views in his comments on Inker's report, saying, “We believe returns across asset classes, including both stocks and bonds, will be lower in the future than we’ve been used to in the past — with equity returns more in the 3.5% range than the 6.6% investors enjoyed historically.”

Inker says stocks may disappoint investors for a few more years, but says there has been no fundamental change that will hurt returns over the long haul.

There is a difference between expecting low returns due to reversion to long-term normal valuations and expecting low returns because something has fundamentally changed about the return-generating process for equities. Whether GDP growth in the U.S. and other developed economies is going to be slower in the future is not, in and of itself, a reason to expect a lower return to equities.