Catherine LeGraw

Catherine LeGraw is a member of the asset allocation team at GMO, the firm founded by Jeremy Grantham that manages roughly $60 billion. GMO is known for its long-term, valuation-driven approach to investing, and Catherine's work focuses specifically on portfolio construction and understanding how different asset classes interact over time. On this episode of Behind the Ticker, she sits down with Brad to discuss GMO's seven-year forecasting framework, their views on where opportunities sit today, and why they think most investors are too concentrated in U.S. large cap stocks.

The Seven-Year Forecast Framework

GMO's entire approach starts and ends with valuation. Catherine explains that the firm builds seven-year real return forecasts for every major asset class. These aren't short-term market timing calls or tactical bets. They're grounded in the observation that asset prices tend to revert to fair value over time. When you buy cheap assets, your expected returns are higher. When you buy expensive assets, your expected returns are lower. It sounds obvious, but most of the industry ignores it.

GMO has been publishing these forecasts for decades, and while the timing of mean reversion is always uncertain, the direction has been remarkably consistent. Catherine notes that the firm's current seven-year forecast shows U.S. large cap equities as one of the least attractive asset classes. Profit margins are elevated well above historical averages, valuations are stretched on multiple measures, and their models project lower real returns for the S&P 500 compared to nearly every other major asset class. That doesn't mean U.S. stocks can't go higher in the short term, but for anyone with a genuine long-term time horizon, the starting point matters enormously.

The Case for International and Emerging Markets

Where GMO sees the real opportunity is outside the U.S. International developed and emerging market equities look significantly cheaper on their models, and the valuation gap between U.S. and non-U.S. stocks has widened to near historic extremes. Catherine explains that these kinds of extremes don't persist forever. Historically, periods of maximum divergence between U.S. and international valuations have been followed by strong periods of outperformance for the cheaper markets.

The pushback they always get is that international stocks have underperformed for over a decade, so why would you bother? Catherine's response is that this is exactly the kind of environment where valuation-driven investors should be paying the most attention. Long periods of underperformance compress valuations and set up the conditions for future outperformance. GMO lived through this dynamic with their emerging market positioning in the early 2000s. It required patience, but the payoff was substantial.

Emerging markets in particular stand out in their models. The combination of lower valuations, younger demographics, growing consumer bases, and improving institutional frameworks makes them one of GMO's highest-conviction allocations. Catherine acknowledges the risks, including governance, currency, and geopolitics, but argues that at current prices, you're being compensated for those risks in a way you haven't been for years.

Fixed Income, Real Assets, and Portfolio Construction

On the fixed income side, Catherine notes that the reset in interest rates has fundamentally changed the math. Real yields are positive again after years of being negative or near zero, which makes bonds genuinely useful in portfolios for the first time in a long while. GMO isn't just looking at Treasuries. They see opportunity across the full credit spectrum, including emerging market debt, where spreads compensate for the additional risk.

Real assets also play a role in GMO's framework. With inflation having proven stickier and more volatile than most expected, having structural exposure to assets that benefit from or protect against inflation makes sense as a permanent portfolio allocation rather than just a tactical trade. Catherine emphasizes that portfolio construction isn't just about picking winners but about building a collection of assets that behave differently across economic environments.

The broader message from Catherine is one of diversification discipline. Most investors today are heavily concentrated in U.S. large cap growth stocks, which has worked brilliantly for the last decade but leaves them vulnerable to a regime change. GMO's approach is to own what's cheap, avoid what's expensive, and let time do the work.

Key Takeaways

• GMO's seven-year real return forecasts show U.S. large cap equities as one of the least attractive asset classes, with international and emerging markets offering significantly better expected returns.
• The valuation gap between U.S. and non-U.S. equities is near historic extremes, which historically has preceded strong outperformance from the cheaper markets.
• Positive real yields have made fixed income genuinely useful in portfolios again. GMO sees opportunity across the full credit spectrum, including emerging market debt.
• GMO manages roughly $60 billion using a valuation-driven framework that has been publishing long-term asset class forecasts for decades.
• The firm's portfolio construction philosophy centers on owning cheap assets, avoiding expensive ones, and maintaining diversification across different economic regimes.

Listen to the full conversation on Spotify, Apple Podcasts, or YouTube.