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Rekenthaler Report

High Market Valuations May Signal Low Future Returns

Investors may not want to expect a lot from Mr. Market in the coming years.

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In the summer of 2000, I vividly recall accompanying John Rekenthaler to meet GMO co-founder Jeremy Grantham in a café in Chicago. Vanguard had just launched its U.S. Value Fund (VUVLX), for which GMO was the subadvisor, and I was the (somewhat) young analyst assigned to cover it. Grantham had agreed to meet to discuss GMO's approach and investment outlook.

I do not remember much about what Grantham said about GMO's approach to selecting individual stocks, but I know that he had a lot to say about market valuations. In particular, he had a firm belief--citing GMO's long-term asset-class forecasts--that U.S. growth stocks were incredibly overvalued. He also said that, as a value-oriented firm, GMO had suffered massive investor redemptions in previous years, thanks to investors' moving assets to more growth-oriented shops.

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Scott Cooley has a position in the following securities mentioned above: APA, COG, NEWFX. Find out about Morningstar’s editorial policies.