Legislature(1999 - 2000)
01/21/1999 04:05 PM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
GENERAL SUBJECT: PRESENTATION BY ALASKA PERMANENT FUND CORP.
CAPITAL MARKETS OUTLOOK
Joint Meeting with the House Finance Committee
The following overview was taken in log note format. Tapes and
handouts will be on file with the Senate Finance Committee through the
21st Legislative Session, contact 465-2618. After the 21st
Legislative session they will be available through the Legislative
Library at 465-3808.
Time Meeting Convened: 4:05 PM
Tape(s): SFC-99 # 4, Side B
Side A
PRESENT:
x
Senator Parnell
x
Senator P. Kelly
x
Senator Torgerson
Senator Leman
x
Senator Phillips
Senator Green
x
Senator Donley
Senator Adams
x
Senator Wilken
ALSO PRESENT:
Representatives: Austerman, Phillips, Bunde, Green, Davies, Mulder,
Smalley, Therriault, Williams,
Grussendorf, Kohring, Joule, Davis
Senator Mackie,
Lynn Thurber, Lasalle Advisors;
Bill Price, Dresdner RCM Global Investors;
Michael O'Leary, Callan Associates;
Byron Mallott, Executive Director, Alaska Permanent Fund Corp.
Jim Kelly, Research and Liaison Officer, APFC
Joan Cahill, Communications Assistant, APFC
Eric Wolfort
David Teal, Director, Division of Legislative Finance
Ginger Blaisdell, Fiscal Analyst, Division of Legislative Finance
TAPE
LOG
SPEAKER
DISCUSSION
4B
Co-Chair Sean
Parnell
Introduction of Senators and
Representatives present
Byron Mallott
Introduction of APFC speakers
988
Michael O'Leary
Background of when presentations
are made
We estimate a general forecast and
ask investment managers to make
specific forecasts
PF estimates relatively
conservative
947
APFC Manager Survey - overhead
Some members are specialists and
we ask for their estimates
939
Inflation Expectations - overhead
All responses uniformly expect
inflation to remain relatively low
- between 2 and 4 %
926
S&P 500 One Year Return
Projections - overhead
5 managers anticipate negative
returns - that surprised me
Clay Finley is European firm-think
that's why negative
6 managers expect 0-10%
3 expect slightly more than 10%
905
That's conservative uniformly
5 Year S&P 500 Projections
Slightly More Optimistic-handout
888
Small Cap Return Forecasts-handout
Smaller cap stocks doing better -
long term trend
Since 1994 large companies doing
much better
Managers saying that will change
to smaller companies doing better
Representative Bill
Williams
Any reasons for that?
Michael O'Leary
My sense is that earning growth
has stalled and larger ratio
between smaller and larger
companies
863
Representative Con
Bunde
Byron Mallott
My understanding is there will be
a bill to modify
Representative
Green
Does this include some companies
that might not make it?
Michael O'Leary
Small companies to us are big
companies to the real world -
examples
International arena -
diversification makes sense
Before didn't make sense - looks
like that might be changing
Managers are more optimistic for
international stocks-handout
Returns measured in US dollars
Co-Chair Sean
Parnell
Housekeeping-ask members to state
name for record when speaking
4A
Michael O'Leary
Significant event is decline in
interest rates
Most expect 5year bond returns to
fall in a range of 5-6.5%
2 firms have slightly higher
forecasts
Real Estate Outlook-handout
Managers generally felt optimistic
Five year estimate fall in 10-12%
range
The Economic Environment for the
Next Five Years-handout
Despite troubles in Asia and
Russia, feel economy will remain
strong - always danger of
recession
Callan's 1999 Capital Market
Projections-handout
Five year capital market
projections
Introduce Bill Price and gave
qualifications
Bill Price
Challenge today is to put global
outlook into perspective
The longest post-year period of
positive growth
Should have had a normal downturn
partly because of boost put into
Also placed a variable into
economy
common stock market before Gulf
War of household sector outlooks
only 17.5% were income in stocks
now gone up to 40-43%
Has created an industry-money
manager
Has drawn precedent amounts of
funds into stock market
Since 1982 interest rates declined
making other money earning methods
necessary - therefore stock market
investments
Market itself and sense of
positive feedback of making money
easily - tends to create adaptive
expectations
Historically has led to overpriced
markets
Alan Greenspan difficult job to
slowly lower expectations plus
global responsibilities
Buyer of last resort to bail out
Asian and Latin American countries
- US is the buyer
Because of that there is a
responsibility we share
Don't want to create picture of
impending doom-but want to lean
against popular belief
Word of caution
Managers are trained in much more
disciplined fundamentals
Internet stocks-not what PF owns
As we look across we see lowering
of growth
4A
Bill Price
Actually experiencing negative
growth while stock market is going
up
Companies can't raise prices
Good news-inflation expectations
continue to be low
Interest rates also remain
relatively low
May go up to 4.5%
Rely on corporate bonds for higher
returns
Exports will be down this year
As reserve currency of the world
are being deluged by
Capital spending we see as
negative - over-invested in past
several years
3 legs of economy
Positive overall gain for the year
1._ %
Rep. Davies
Real Estate - people waiting for
the bottom to fall out - does that
lead to expectation that dividend
should go up
Bill Price
Talking about cyclical risk - not
talking about Depression- talking
about normal cycles
Policy responses have become much
more sophisticated
Nothing irresponsible about equity
position
Question of unrealized gains
separate issue
Much more mechanical
No accident that last year better
stocks limited to better group
Breakdown of earning of S&P 500
2B
4:52 PM
Bill Price
Continued detailing eschew of 500
stocks
Talking about overextended sector
of the market
If you realized those gains the
challenge would be to reinvest
those assets with same returns if
you could do in short period of
time
Doesn't really affect those
posture but does affect the
dividend
Issue that needs to be addressed -
beyond us right now
The average 3-5 year annual rate
about 20%
Price earnings ration to its
growth rate
Small stocks slightly more
volatile now have higher returns
and better evaluations
Begin to take some of those
profits off the table and reinvest
in smaller companies that are
doing better
Diversity of managers
Rep. Bunde
Refer to discussion of IRS
ramifications if provide residents
with straight earnings - want to
talk about later
Michael O'Leary
Introduce Lynn Thurber and list
qualifications as real estate
expert
115
Lynn Thurber
Perspective that we will be able
to provide higher returns than
stock managers
Low inflation and slow economic
growth
May be surprising that we predict
high growth in private industry
We believe to be strong in private
real estate industry
Vacancy rates as low as 6 % in
quality office space
That supply and demand basis
allows for higher rental rates and
property values
Stopping pipeline of new
construction for areas of high
vacancy
Will see higher vacancies but
moderate
Then when this pipeline finished
won't see new pipeline until after
2001-vacancies will slowly fill up
during that time
In place leases giving annual
return of 9%
Leases long term - turnover will
be for rentals which will have
higher return because of higher
rents
Property types and sectors
Greatest appreciation and return
in single family
Multi family apartments in balance
Area of concern is retail
Regional malls given too much
space - square footage in US 5
times as rest of the world
We expect them to become
entertainment centers
Sectors of the country SW and SE
greatest
Sector very disappointing -18% **
Publicly traded rates
Occurred year after 37% return
rate
1997 number of investors came into
market looking for growth then
left no longer saw growth
opportunity
Correct to see that - tax changes,
other things
Our view is that they overreacted
Average return of 7.5% better than
other stocks
Companies already have imbedded
growth
Also they bought a number of
properties and seeing income
Stock price is below underlying
assets
We believe they will provide 7.5%
dividends
4B
Lynn Thurber
Conclude
272
Michael O'Leary
Bill Price
Increased portfolio by 40% last
year
Senator Gary Wilken
Money supply and inflation
forecast questions
Are the 2 working together
Bill Price
Huge money growth part of US
policy to optimize employment
Excess of supply of goods relative
to demand
Huge import from out of country
Improvements in technology
All factors together
When you put too much money in
economy it can't absorb extra goes
into financial account
Alan Greenspan very nervous
because he created it
Driven up bond prices
Excess liquidity is our concern
What would happen if the fed rose
interest rates to reign in supply
- people won't expect
Rep. Williams
Is that why market so volatile
today?
Bill Price
Characteristic of market later
stage
20% of market done over computer
That is part of reason for
volatility
It's just noise - just gets more
volatile and gives less
information
Co-Chair Sean
Parnell
Follow-up - same said for Y2K
issue - is it just noise?
Bill Price
Most bull markets end with a shock
- Lt. Gov. statement
So much said about issue it can't
be a surprise
Think much more serious issue
outside US
Enough of a trauma to end market?
Hard to tell
Senator Pete Kelly
If more problem outside US - will
it actually work to our benefit by
slowing down their economy and
production
Bill Price
Doubt it - will cause disruption
in their economy in their system
with banking industry
Senator John
Torgerson
Predictable time when portfolio
might not perform as expected?
Bill Price
Personal view - yes
Longest recorded bear market -
gold
Can allow demand to slowly go up
Michael O'Leary
About year ago permanent fund
thought good example to have a
model for a management tool
Overhead-Range of Ending Market
Value
Byron Mallott
February meeting presentation
4B
Michael O'Leary
When making long term tend to
think in average terms
Model designed to faithfully
project market value
Starts with September quarter
which was bad
Shows the range of possible
outcomes over next 5 years
Not only what's the average but
what's the range around the
average
Give full average not just middle
of the road
Jim Kelly
Ask to explain colors in overhead
Michael O'Leary
How active are the managers in
projecting gains
Look at turnover rate in the
portfolio
Byron Mallott
We have not figured into model
one-time $4billion transfer
Rep. Green
Percentiles up the scale to 2001
then slacking coming back up in
2003
Michael O'Leary
Given current policy expect a
little less than 8 percent
Co-Chair Sean
Parnell
Thank presenters
Rep. Mulder
Thank presenters
523
Co-Chair Sean
Parnell
Adjourn 5:32 PM
SENATE FINANCE COMMITTEE
LOG NOTES
1/21/99
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