How the SBA is Viewing a Changing World |Lamar Taylor, CIO, Florida State Board of Administration | June 26, 2025“If the view is that we should think about recalibrating global trade, particularly with our trade deficits, keep in mind there may be a countervailing impact, which is capital flow outside of the United States.”)“How the SBA is Viewing a Changing World” Lamar Taylor, Chief Investment Officer for the Florida State Board of Administration, discusses the SBA's $275 billion asset management, focusing on asset allocation, assumptions, and potential changes in the economic landscape, before a June 26, 2025 meeting of The Economic Club of Florida. Show notesWith his slides, Mr. Taylor showed the Club how the Florida pension plan ranks very well against the top ten defined benefit plans in the country. He said he achieves that through asset allocation. Currently about 47% of the fund is in global equities, about 10% in real estate, and the rest in fixed income assets such as treasuries, mortgage-backed securities, and commercial paper. He reviews asset allocation every three to five years and works to get the most efficient return for the asset mix. Mr. Taylor said that Covid exposed weaknesses in the supply chain which led to an effort to re-shore and near-shore those supply chains. The changes have required people to spend money. Add in labor expense, energy transition, and an aging population, and those expenses affect equities. “Equities are about as expensive as they’ve ever been,” he said, “and particularly U.S. equities are expensive.” The price-to-earnings (P/E) multiples are now about 21-times forward-looking earnings. He said that it was his opinion that U.S. equities are primarily expensive because of concentration, particularly in: · The Magnificent Seven (principally tech companies in Artificial Intelligence - AI) of the S&P 500 Index · Spending by wealthy U.S. consumers “A quarter to a third of the growth in U.S. GDP is attributable to capital expenditures in AI,” Mr. Taylor said, as he expressed concern about how large capital expenditures in the past, such as the Dot-Com boom, have not ended well. “Maybe AI is different. Who knows? I don't know. These are huge companies. They can afford it. They have fantastic earnings.” He said that half of U.S. spending is attributable to the top 10% of income earners. Their spending used to be in the 30-35% range. The top 20% of incomes now own 90% of equity securities, and the top 1% own almost 40% of those securities. Recently there have been calls for returning manufacturing to the country and reducing our trade deficit. Mr. Taylor said he has begun to look at those changes differently through a concept called identity-of-payments. He said the United States has been the destination for foreign capital for more than 40-years. “Because we are buying more than we're selling in the goods market, by definition, you’ve got to be importing capital to be able to do that,” he said. “It doesn't mean that trade deficits cause capital surpluses. It could be the capital surplus has caused trade deficits, because you've got so much capital in-flowing into your capital markets. The value of your currency goes up so much that it makes goods produced elsewhere much cheaper. All of that inflow of capital creates demand for our securities and pushes the cost of capital down, because there's more demand than there is supply. So, prices go up, yields go down.” And that, he said, has been a big benefit to U.S. asset holders. “It's benefiting U.S. households in terms of their net worth over time. If the view is that we should think about recalibrating global trade, particularly with our trade deficits, keep in mind there may be a countervailing impact, which is capital flow outside of the United States.” He said he is studying how that concept might affect his fund’s asset allocation in the future. Mr. Taylor concluded by acknowledging the importance of AI, but said that he is not among the first movers in adapting it to his fund operations. “We kind of want to watch and see how other people adopt, and learn from other people's mistakes rather than making them ourselves, if we can.” (You can also view the entire Club meeting on YouTube.) Links and Resources Mentioned in this EpisodeFlorida State Board of Administration
Date of recording June 26, 2025 |