Something for everyone at Milken conference

A near-term recovery of the global economy was given no better than 50/50 odds by Mohamed El-Erian, CEO and co-chief investment officer of Pacific Investment Management Co. LLC during a packed session of the Milken Institute Global Conference.

Mr. El-Erian's wager on the outcome for the world economy was on the optimistic end of the spectrum among the 620 speakers featured in 140 panel discussions viewed by 3,900 attendees at the annual Milken conference April 28-May 1 in Beverly Hills, Calif.

Blame for global economic woes was placed squarely on quantitative easing efforts by the U.S. Federal Reserve Bank and other central banks. “There are two policymakers — the Fed and Congress,” said Kenneth C. Griffin, founder and CEO of hedge fund manager Citadel LLC, Chicago. “The Fed is doing things to fix what Congress is doing. ... It is extremely difficult to navigate a market which is being dominated by political influence.”

Madelyn Antoncic, vice president and treasurer of The World Bank, Washington, said: “We don't have real fiscal policy ... the Fed is trying to do the fiscal side's work” rather than seeking to solve some of the structural problems of the U.S. economy.

Mr. Griffin said the real question is whether the Fed is “willing to continue to monetize the country's debt to hide politician's mistakes.”

There is a “ticking time bomb” in the U.S debt markets, noted Wilbur L. Ross Jr., chairman and CEO of WL Ross & Co., a subsidiary of Invesco Ltd., Atlanta.

“We are building a bigger time bomb” with $500 billion a year in debt coming due between 2018 and 2020, when they might not be able to be refinanced as easily as they are today, he said.

Mr. Ross said one-third of first-time issuers had CCC or lower credit ratings and more than 60% of the high-yield bonds were refinancings in 2012.

None of that capital was to be used for expansion or working capital, Mr. Ross said, just refinancing balance sheets. This means companies had no cash on hand to pay off old debt, he said.

“We are building a bigger time bomb” with $500 billion a year in debt coming due between 2018 and 2020, when the bonds might not be able to be refinanced as easily as they are today, Mr. Ross said.

The 10-year Treasuries are not even safe, Mr. Ross said, because if they revert to the average yield seen between 2000 and 2010, they will be down 23%.

“If there is so much downside risk in normal Treasuries,” what about high yield, he asked. “We may look back and say the real bubble is debt,” Mr. Ross said.

Both Mr. Griffin and John Calamos Sr., CEO and global co-chief investment officer of Calamos Investments LLC, Naperville, Ill., agreed a bit of inflation would “spur growth,” as Mr. Griffin said.

“A little inflation — 2% to 3%” — would be “a good thing ... because the Fed is much better at controlling inflation than it is at controlling deflation,” said Mr. Calamos, who added that an increase in interest rates also would not be “a bad thing.” The rise would enable banks to start lending to small companies again, fueling job growth.

When asked what has changed since last year's Milken Global Conference, David Bonderman, founding partner of private equity firm, TPG Capital said, “We came to terms that Europe is not going to fall into the sea.”

But he added there is less investment opportunity than people thought there would be in European distressed debt. So investors are moving back to the U.S.

There is plenty of low-cost financing, said Leon Black, chairman and CEO of New York-based alternative investments firm Apollo Global Management LLC.

“It's back to 2007 levels. There is no institutional memory. Rates have never been this low for high-yield bonds,” Mr. Black said.

Meanwhile, some of the heaviest hitters in real estate disclosed where they would go in search of investment opportunities.

For Beverly Hills, Calif.-based global real estate firm, Kennedy Wilson Holdings Inc., the answer is Ireland. One-third of the $8.5 billion invested by Kennedy Wilson since 2010 has been invested in debt and properties in Ireland, said William McMorrow, Kennedy Wilson chairman and CEO, speaking on a panel on global opportunities in commercial real estate.

In the past year, rents in Ireland have gone up and occupancy is close to 95%, Mr. McMorrow said.

One reason is that Ireland has been affected by California-based technology companies such as Google and Facebook opening offices in Ireland, he said.

Sam Zell, chairman of Chicago-based Equity Group Investments, who spoke on the same panel, said he would not invest in Ireland because Ireland has too small a population. Instead, he prefers to invest in Brazil, even though growth has slowed and Colombia.

Peter Lowy, co-CEO of mall investment and management company Westfield Group LLC, Sydney, said that his firm, by the end of next year will have been invested €1.4 billion ($1.84 billion) in Milan.

“We did the same thing in Sydney. When you invest in major assets with major market penetration, you get very, very good returns,” Mr. Lowy said.

During three sessions focused exclusively on pension fund issues, 10 senior investment officers described myriad ways they are staying ahead of their funding obligations.

A hybrid structure, reasonable wage growth, solid investment performance, no cost-of-living adjustments for retirees, a conservative liability calculation and solid governance were the drivers behind the 99.9% funded status of the Wisconsin Retirement System in 2012, said David Villa. Mr. Villa is CIO of the State of Wisconsin Investment Board, Madison, which manages the state's $84.6 billion defined benefit plan.

The problem of pension underfunding “is really governance, not structure,” he said.

The “unique” structure of the New York Retirement Systems, in which investment authority resides within five different pension boards, “makes us much less nimble,” acknowledged Lawrence M. Schloss, deputy comptroller for asset management and CIO of $127.5 billion in aggregate assets.

“The governance structure determines the success of any corporate pension plan,” said Brian Pellegrino, CIO of Atlanta-based United Parcel Service Inc.'s defined benefit plans, with $27 billion in assets.

“You need to allow the investment professionals to make these decisions and not try to get trustees with `day jobs' to come to a quarterly meeting and make investment decisions,” he added.

The North Carolina Legislature sets the investment authority of state Treasurer Janet Cowell, as sole trust-ee of the $78.1 billion North Carolina Retirement Systems, Raleigh.

Ms. Cowell said she needs to shift more assets from equities and fixed income to reach the 7.25% long-term assumed rate of return, given predictions of a decade of poor returns ahead. “We can't hedge out 10 years of slow growth,” she said.

Ms. Cowell is backing a bill in the Legislature that would double the system's allocation to alternative investments to 40%.

“We will try to get as much flexibility as we can,” said Ms. Cowell, who told the Milken audience that possible new investment directions include activist equity strategies, U.S. energy, secondary market private equity, credit and distressed debt as well as international fixed income.