Investment Pros May Face Years of Fickle U.S. Stocks

Here’s a sure way to mentally shake up a couple hundred money managers: Invite them to a big investment conference and headline your keynote speaker’s address, “Will the Last Investment Manager to Leave (the Profession) Please Turn Out the Lights?”

For the pros who gathered at the annual Collins Associates investment conference in Newport Beach this week, the overtone would have been sober anyway--given the awful year most investors are having in the extraordinarily fickle stock market. The average New York Stock Exchange issue’s gain year-to-date is a mere 1.6%.

But the managers’ collective mood was further dampened by the warnings of many of the speakers, who included some of Wall Street’s top strategists. Their basic message: The outlook is terribly disappointing for U.S. stocks after the unsustainably high returns of the ‘80s. Yet neither the pros nor their clients seem prepared for the turmoil and poor results that lie ahead.

This isn’t a new theme, of course. In fact, the people spouting it have generally been doing so for a few years now. But they--and their audience in Newport--appeared more convinced than ever this week that they’re finally about to be right.

The keynote speaker, a Wall Street sage named Jeremy Grantham of the firm Grantham, Mayo, Van Otterloo & Co., laid it on the line: Might as well forget U.S. stocks--period--in the ‘90s, he says.

For one thing, there’s the obvious problem of U.S. stocks’ historically high prices relative to earnings and historically low dividend yields. Grantham says: “They are the highest-priced asset class in the world, except for Japanese real estate.”

But the strongest argument against the U.S. market is just that it has become so efficient. Grantham argues that the ability of most investors to simultaneously know all there is to know about major U.S. firms means the opportunities to “beat the market” over any period are dwindling.

This has been an ongoing trend, he adds, but the “decay” in U.S. money manager performance was hidden in the ‘80s by the outsized bull market. Now, with the economy growing slowly at best and no prospect for a fantastic, new bull run in stocks, the reality of our market’s incredible efficiency will doom most pros to mediocre performance or worse in the ‘90s, Grantham contends.

The managers’ clients, however, will hardly be willing to silently settle for mediocrity, he says. Hence his warning about a potential shakeout in the investment business as this year’s tough stock market repeats throughout the ‘90s, leaving money managers who remain largely invested in U.S. stocks continually searching for excuses.

But what, exactly, are market pros supposed to do? Their clients, after all, expect them to own stocks, not whine that the market is “too efficient.”

Grantham’s answer is that Americans should still be investing--but that they should shift more to foreign stock markets, which are far less efficient than the U.S. market and offer economic growth rates far exceeding our own.

Think of it this way, Grantham says: From 1972 to 1982, the correct “big idea” on Wall Street was investing in U.S. small stocks. Pros who concentrated there for that period came out far ahead of the competition. Then, from 1982 until this year, the “big idea” was consumer-franchise investing, Grantham says, meaning the Coca-Colas and other suppliers of consumer goods. Owners of those stocks outdistanced all of their peers.

Foreign stock investing--and the de-emphasis of U.S. stocks--will be the “big idea” of the next 10 years, Grantham predicts, and the only way for most U.S. investors to boost their returns as Wall Street’s party inevitably shifts to low gear.