There are a lot of solutions to these challenges around retirement. First, people could work longer. That will close some of the gap, but not all. The second is that we have to reimagine defined-contribution plans. One solution could be adding an insurance component, basically taking the defined-contribution plan and making it look more like a defined-benefit plan because if you add annuities to it, you can produce lifetime income.
The third challenge is that we have to hunt more for income-producing assets, and we need to incorporate some of the things that have gone to private markets into retirement portfolios for clients.
If we look at the US public equity market, there are 50% less listed companies now than there were 20 years ago. And I think we are at the very early stages of fixed income being disrupted. We’ve seen that in the rise of private credit. Pre-global financial crisis, that asset class basically didn’t exist, and now it’s well over $1 trillion and taking share from the bank syndicated-loan market. And then there’s the securitized market, asset-based finance, which used to be largely publicly listed, and now many of the opportunities are private.
We are going to have to create more product for the defined-contribution space that can give dedicated exposure to some of these less liquid assets that may have higher income production than what’s available in public markets.
There are some very important investment implications for how we position portfolios today. Health care is obviously one, with artificial intelligence opening the doorway for personalized medicine and targeted gene therapies. We’re seeing a massive inflection in the cost curve around how this happens. One less obvious one is how we’re thinking about navigating the real estate landscape. We’re very positive on residential real estate, both through credit as well as equity. One reason for that is we have a very undersupplied market by about 10 million units.
Longevity is also a key tenant of this investment thesis for us. And the reason for that is that the older population is staying in their homes longer. In fact, homeownership rates for people 65 and over are 80%. That compares with 65% for overall homeownership rates in America and 40% for people ages 35 and under. And so longevity is actually exacerbating that supply-demand dynamic and underpinning our positive view on why to be overweight residential.
When it comes to commercial real estate, we’ve been quite public in our concerns that one of the largest components of that sector, which is office, is a near-term risk over the next couple of years. Still, there are other types of commercial real estate that are of interest to us, including senior living. That would include independent senior living, assisted senior living, memory-care facilities, lab space, hospitals, all of the things that are going to require new square footage to address this longevity trend.
The American Dream
RAY MCGUIRE
President, Lazard Inc.
The issue that will determine how our country fares both locally and globally is education. It’s at the core of whether we have the opportunity to realize the American Dream. It’s also at the core of whether America can remain in the lead of innovation and competitiveness.
And the returns that we’re generating are unremarkable at best. At the national level, we spend $800-plus billion dollars, which may sound like a lot. That’s 3% to 5% of the budget. And we spend maybe 20% on defense. Both are obviously important, but you can see the delta.
Not withstanding the amount of dollars that we’ve spent, we’ve dropped on a global stage. It used to be that we were in a premier position, now we’re in a secondary position. If I look at degrees that are conferred in the higher technologies, most don’t go to Americans. In 10 years, we’ll see that there’s an erosion in our competitiveness.
We’re creating a permanent underclass. It used to be that education afforded us the opportunity to realize the American Dream. Today, it’s so stratified that a significant percentage of our population will never realize it.
In New York City, the largest public school system in the country, we spend $35 billion to $37 billion a year. If I look at the latest nation’s report card on the performance of Black and Brown students in the city, 60% to 70% are below proficient. So I look at that and say “We need new investors.”
Illiteracy today reflects the abject failure of leaders in the educational world. The crisis is today. And so we need to be urgent.
At Lazard, have a program called New Visions for 11th- and 12th-grade public school students. Last year, we had 21 or so schools represented — 300 and some-odd students — exposing them to the opportunities that exist in the world of finance and elsewhere. It’s these kind of public private partnerships that will allow those who are reliant on the public school system to get educated.
The crisis in education has become more intergenerational and parents need more support — more emotional support, more economic support. We need to invest from the state universities to the private ones, from the Georgia Techs to the Caltechs, from CUNY and SUNY to Yale and Harvard. And we need to have the best.
We begin to care when it begins to impact our lives, when those who have less hope begin to encroach on neighborhoods where hope is clearly reflected. When we see what’s happening in the urban world get closer to the suburban world, then we’ll attend to it. But it’ll be too late, as the boundaries get crossed between those who are educated and those who are uneducated, who have no hope.
You can see the impact that it’s having, especially on Black and Brown communities. It’s a matter of race and economic circumstances. We tried to combat this in 1954. And where are we today? Looks as if we’ve gone backward on every metric. It’ll have an impact on rural White communities that aren’t being educated.
A fundamental worry I have is that unless we address this with urgency, it worsens. We’re already in a catastrophic phase with systemic challenges abounding. This is the most fundamental right that we have as a country, which is to educate our population. We’ve taken it for granted and we can no longer do that.
This article was provided by Bloomberg News.