GMO Forecast Accuracy Test

A subscriber suggested an update of “GMO’s Stunningly Accurate Forecast?” with out-of-sample testing of GMO forecasts. To investigate, we test GMO’s 7-Year asset class real return forecasts of December 31, 2010, July 31, 2013, June 30, 2014 and November 2015. We first match the 11 GMO asset classes covered in these forecasts to exchange-traded funds (ETF), as follows:

1. U.S. equities (large cap) – SPDR S&P 500 ETF Trust (SPY).
2. U.S. equities (small cap) – iShares Russell 2000 ETF (IWM).
3. U.S. high quality – Invesco S&P 500 Quality ETF (SPHQ).
4. International equities (large cap) – iShares MSCI EAFE ETF (EFA).
5. International equities (small cap) – iShares MSCI EAFE Small-Cap ETF (SCZ).
6. Emerging equities – iShares MSCI Emerging Markets ETF (EEM).
7. U.S. bonds (government) – iShares 20+ Year Treasury Bond ETF (TLT).
8. International bonds (government) – SPDR Bloomberg Barclays International Treasury Bond ETF (BWX).
9. Emerging bonds – iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB).
10. Inflation-indexed bonds – iShares TIPS Bond ETF (TIP).
11. Short-term U.S. Treasuries (30 days to 2 years) – iShares 1-3 Year Treasury Bond ETF (SHY).

We adjust monthly ETF returns for inflation using monthly changes in U.S. Consumer Price Index (CPI). We then calculate the real compound annual growth rate (CAGR) for each over specified forecast horizons. Using GMO forecasts, dividend-adjusted ETF prices and CPI data during December 2010 through November 2022, we find that: (more…)