CFA三级基础段：机构IPS-Irene（打印版）

Portfolio

Managementfor

Institutional

Investors

),'Ѕঃ׀੟஍ࣹ

ઔ٤͹/XKTK



1-95

TopicinCFALevelIII

Session

Content

ETHICS&PROFESSIONALSTANDARDS(1)&(2)

BEHAVIORALFINANCE

StudySession1-2

StudySession3

StudySession4

StudySession5

StudySession6

StudySession7-8

StudySession9-10

StudySession11

CAPITALMARKETEXPECTATIONSǏNEWǐ

ASSETALLOCATIONANDRELATEDDECISIONSINPORTFOLIOMANAGEMENT

DERIVATIVESANDCURRENCYMANAGEMENTǏNEWǐ

FIXED-INCOMEPORTFOLIOMANAGEMENT(1)&(2)

EQUITYPORTFOLIOMANAGEMENT(1)&(2)

ALTERNATIVEINVESTMENTSFORPORTFOLIOMANAGEMENTǏNEWǐ

StudySession12-13PRIVATEWEALTHMANAGEMENT(1)&(2)ǏNEWǐ

StudySession14

StudySession15

StudySession16

PORTFOLIOMANAGEMENTFORINSTITUTIONALINVESTORSǏNEWǐ

TRADING,PERFORMANCEEVALUATION,ANDMANAGERSELECTIONǏNEWǐ

CASESINPORTFOLIOMANAGEMENTANDRISKMANAGEMENTǏNEWǐ

2-95

¾

SS14PortfolioManagement

Framework

forInstitutionalInvestors

PortfolioManagementfor

InstitutionalInvestors

•

R33PortfolioManagementfor

InstitutionalInvestors

9Commoncharacteristicsof

InstitutionalInvestors

1.Pensionplan(DB&DC)

2.Sovereignwealthfunds

3.Universityendowments

4.Privatefoundations

5.Banks

6.Insurers

3-95

InstitutionalInvestors

¾TypesofinstitutionalinvestorsintheLevel3curriculum:

zPensionplans

zSovereignWealthFunds

zUniversityEndowmentsandPrivateFoundations

zBanksandInsurers

New

Stakeholders

Old

S

L

LiquidityNeeds

LiquidityNeeds

TimeHorizon

Unique

L

LiabilitiesandInvestmentHorizon

ExternalConstraints

E

(R)

I

Risk(onlyforDB&DC)

InvestmentObjectives

Risk(onlyforDB&DC)

Return

A

AssetAllocation

4-95

InstitutionalInvestors

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

PensionPlan

PensionPlan,Endowments&Foundation

PensionPlan,LifeInsuranceCompany

Endowments&Foundation

PensionPlan

PensionPlan,Endowments&Foundation

PensionPlan,Endowments&Foundation

PensionPlan,Endowments&Foundation

Endowments&Foundation

PensionPlan

Endowments&Foundation

5-95

Reading

33

PortfolioManagementforInstitutionalInvestors

6-95

InstitutionalInvestors:CommonCharacteristics

¾Scale(i.e.,assetsize):Theissueofscaleisrelevantforinstitutional

investorsbecauseitmayimpactinvestmentcapabilities,accesstostrategies,

liquidity,tradingcosts,andotherkeyaspectsoftheinvestmentprocess.

zInstitutionalinvestors’assetsundermanagementcanrangefrom

relativelysmall(e.g.,lessthanUS$25million)torelativelylarge(e.g.,

morethanUS$10billion).

zSmallerinstitutionsmayfacechallengesthatunabletoaccesscertain

investmentsthathaveahighminimuminvestmentsize.

9Smallinstitutionalinvestorsmayalsofacechallengesinhiring

skilledinvestmentprofessionals.Theyaremorelikelytooutsource

investmentstoexternalassetmanagersandrelyoninvestment

consultants.

zLargerinstitutionalinvestorsexperiencescalebenefitsthatallowthem

accesstoawiderinvestmentuniverse,andtheycanreadilyhire

investmentprofessionals.

7-95

InstitutionalInvestors:CommonCharacteristics

¾Long-terminvestmenthorizon:Institutionalinvestorsgenerallyhavea

long-terminvestmenthorizonthatisoftendeterminedbyaspecific

liabilitystream,suchasthebenefitobligationofapensionplan,the

spendingpolicyofanendowment,orotherobligations.

zPensionfunds,sovereignwealthfunds,endowments,and

foundationsalltypicallyhavelonginvestmenthorizonsand

relativelylowliquidityneeds.

9Lowliquidityneedsallowtheseinstitutionstoinvestinabroad

rangeofalternativeassetclasses,includingprivateequity,private

realestate,naturalresources,infrastructure,andhedgefunds.

zBanksandinsurancecompanies,however,tendtobemuchmore

asset/liabilityfocusedwhileoperatingwithintightregulations

designedtoensureadequacyofcapital.

8-95

InstitutionalInvestors:CommonCharacteristics

¾Governanceframework:Institutionalinvestorstypicallyimplementtheir

investmentprogramsthroughaninvestmentofficethatoftenhasa

clearlydefinedgovernancemodel.Thegovernancestructuregenerally

includesaboardofdirectorsandaninvestmentcommittee.

zTheboardand/orinvestmentcommitteeprovideakeyrolein

establishingtheorganization’sinvestmentpolicy,definingtherisk

appetite,settingtheinvestmentstrategy,andmonitoringthe

investmentperformance.

zTheboardmaycomprisecompanyrepresentativedirectors,

employeerepresentativedirectors,andindependentdirectors.

9Independentdirectorsareusuallyselectedtoincreasetheboard’s

overallinvestmentexpertise.

zInvestmentcommitteescanbesub-committeesoftheboardwith

delegatedauthoritytooverseeinvestmentpolicy.

9-95

InstitutionalInvestors:CommonCharacteristics

¾Regulatoryframeworks:Institutionalinvestorsmustcontendwith

multipleregulatoryframeworksthatfrequentlyvarybyjurisdictionand

complexityandareoftenevolving.

zRegulationshavebeentightenedsincethe2007-2009global

financialcrisisinanattempttolowerleverage,increasecentralized

clearing,andimprovereportingtransparency.

¾Principal–Agentissues:Asinstitutionalinvestorsmanageassetson

behalfofothers,principal–agentissuesmustberecognizedand

managedappropriately.

zForinstitutions,thisconflictoccursinternallythroughthe

appointmentoftheinvestmentcommitteeandinvestmentstaffand

occursexternallythroughtheuseofoutsourcedinvestment

managers.

10-95

OverviewofIPS

¾TheIPSestablishespoliciesandproceduresfortheeffectiveadministration

andmanagementoftheinstitutionalassets.Awell-craftedIPScanhelp

minimizeprincipal–agentchallengesbyprovidingclearguidanceonday-to-

daymanagementoftheassets.TheIPSshouldinclude:

zTheinstitution’smissionandinvestmentobjectives(i.e.,returnandrisk

tolerance).

zDiscussionoftheinvestmenthorizonandliabilities.

zAnyconstraintsaffectingtheassetallocation(legal,regulatory,tax,and

accounting).

zAssetallocationpolicywithrangesandassetclassbenchmarks.

zRebalancingpolicy.

zReportingrequirements.

zTheIPSshouldbereviewedannuallyorwhenmaterialchangesoccur

ininvestorcircumstancesand/orthemarketenvironment,astheIPS

servesasthefoundationfortheinvestmentprogram.

11-95

InvestmentApproaches

¾Theinvestmentportfolioofaninstitutionalinvestorisdesignedtomeetits

objectivesandshouldreflecttheappropriateriskandliquidity

considerationsaddressedintheIPS.

¾Whileinstitutionalinvestorseachhaveuniqueliabilitycharacteristics,four

differentapproachesevolved,including:

zNorwayModel;

zEndowmentModel;

zCanadaModel;

zLiabilityDrivenInvesting(LDI)Model.

12-95

InvestmentApproachDescription

¾NorwayModel(sovereignwealthfund)

zTraditionalstylecharacterizedby60%/40%equity/fixed-income

allocation,fewalternatives,largelypassiveinvestments,tighttracking

errorlimits,andbenchmarkasastartingposition.

zPros:Lowcost,transparent,suitableforlargescale,easyforboardto

understand.

zCons:Limitedvalue-addedpotential.

¾EndowmentModel(universityendowmentͧЬޥSWF,DB)

zCharacterizedbyhighalternativesexposure,activemanagementand

outsourcing.

zPros:Highvalue-addedpotential.

zCons:Expensiveanddifficulttoimplementformostsovereignwealth

fundsbecauseoftheirlargeassetsizes.Highfees/costs

13-95

InvestmentApproachDescription

¾CanadaModel(pensionplanͧЬޥSWF)

zCharacterizedbyhighalternativesexposure,activemanagement,and

internallymanagedassets.

zPros:Highvalue-addedpotentialanddevelopmentofinternal

capabilities.

zCons:Potentiallyexpensiveanddifficulttomanage.

¾LDIModel(banks&insurersͧЬԔ܍ষࣩ֡DBո଑Ӣࡔࠍ⠽াଟ)

zCharacterizedbyfocusonhedgingliabilitiesandinterestraterisk

includingviaduration-matched,fixed-incomeexposure.Agrowth

componentinthereturn-generatingportfolioisalsotypical(exceptions

beingbankandinsurancecompanyportfolios).

zPros:Explicitrecognitionofliabilitiesaspartoftheinvestmentprocess.

zCons:Certainrisks(e.g.,longevityrisk,inflationrisk)maynotbehedged.

14-95

1.PensionFunds

¾Pensionfundsarelong-termsavingandinvestmentplansdesignedto

accumulatesufficientassetstoprovideforthefinancialneedsofretirees.

¾Therearetwomaintypesofpensionplans:

zDefinedbenefit,inwhichaplansponsorcommitstopayingaspecified

retirementbenefit.

zDefinedcontribution,inwhichcontributionsaredefinedbutthe

ultimateretirementbenefitisnotspecifiedorguaranteedbytheplan

sponsor.

¾Globally,therearemanyvariationsandnuancesofthesetwobroad

categoriesofpensionplans.

15-95

TypesofPensionPlans

¾ComparisonofDB&DCPensionPlan

CharacteristicsDefinedBenefitPensionPlanDefinedContributionPensionPlan

Benefitpayoutsaredefinedby

Benefitpayoutsaredeterminedby

Benefit

payments

acontractbetweenthe

employeeandthepension

plan.

theperformanceofinvestments

selectedbytheparticipant.

Theemployeeistypicallytheprimary

contributor—althoughtheemployer

maycontributeaswellormayhavea

legalobligationtocontributea

Theemployeristheprimary

contributor,thoughthe

employeemaycontributeas

well.

Contributions

percentageoftheemployee’ssalary.

Theemployeedetermineshowmuch

tosaveandwhattoinvestintomeet

his/herobjectives(fromtheavailable

menuofinvestmentvehiclesselected

bytheplansponsor).

Thepensionfunddetermines

howmuchtosaveandwhatto

investintomeettheplan

objectives.

Investment

decision

making

16-95

TypesofPensionPlans

CharacteristicsDefinedBenefitPensionPlanDefinedContributionPensionPlan

Theemployerbearstherisk

Theemployeebearstheriskofnot

thattheliabilitiesarenotmet

andmayberequiredtomake

additionalcontributionsto

meetanyshortfall.

Investment

risk

meetinghis/herobjectivesforthis

accountintermsoffunding

retirement.

Mortalityriskispooled.Ifa

beneficiarypassesawayearly,

he/shetypicallyleavesa

Theemployeebearstheriskofnot

meetinghis/herobjectivesforthis

accountintermsoffunding

retirement.Theemployeebears

longevityrisk.

Mortality/

portionofunpaidbenefitsin

Longevityriskthepooloffsettingadditional

benefitpaymentsrequiredby

beneficiariesthatlivelonger

thanexpected.

17-95

DB:Stakeholders

¾Plansponsors(employers)mustmakecontributionstoplanassets.Poor

investmentperformancewillresultinsponsorshavingtomakeextra

contributionstoanunderfundedplan(i.e.,whenassetsarelowerthan

liabilities).

¾Planbeneficiaries(employeesandretirees)facetheultimateriskthatan

employerdefaultsoncontributionstoplanassets.

¾Theinvestmentstaff,theinvestmentcommittee,and/ortheboardare

directlyimpactedbythesuccessorfailureoftheplan.

¾Governmentsarestakeholdersinthattheyprovidetaxincentivesfor

employeestosaveforretirement,andtaxpayerswillultimatelyfacethe

costsofprovidingwelfareforthosethathavefailedtoadequatelysavefor

retirement.

¾Shareholdersinthecorporateemployerarestakeholderssincean

underfundedplanwillcauseabalancesheetliabilityandlowerincomefor

thecompany.Itwillalsoleadtohigherfinancialrisk,whichwilllikely

increasesharepricevolatility.

18-95

DB:LiabilitiesandInvestmentHorizon

¾TheliabilitiesofaDBpensionplanarethepresentvalueofthefuture

paymentsitwillmaketobeneficiariesuponretirementdisability,ordeath.

¾Inestimatingfuturebenefits,theplansponsormustmakeseveralkey

assumptions,suchasthegrowthrateofsalaries,expectedvesting,and

mortalityanddisabilityassumptions.

zVestingmeansthatemployeesonlybecomeeligibletoreceivea

pensionaftermeetingcertaincriteria,typicallyaminimumnumberof

yearsofservice.

¾Acommonpensionindustrymetricusedtogaugeassetsufficiencyisthe

fundedratio,alsoknownasthevestedbenefitindex(VBI)insome

countries.Thefundedratioisdefinedas:

ݑܨ݊݀݁݀ݎܽݐ݅݋

ൌ݂ܽ݅ݎݒ݈ܽݑ݁݋݂݌݈ܽ݊ܽݏݏ݁ݏݐȀܸܲ݋݂ܦ݂ܾ݂݁݅݊݁݀݁݊݁݅ݐ݋݂݋ܾ݈݅݃ܽݐ݅݋݊ݏ

19-95

DB:Liabilities

Impactof

Factor

Rationale

IncreaseinFactor

Service/tenure

(yearsworked)

Benefitsareusuallylinkeddirectlytoyearsof

servicebytheemployee.

Increasesliability

Salary

IncreasesliabilityBenefitsareusuallylinkedtofinalsalary.

Planparticipantsarepaidbenefitsforeveryyear

Increasesliabilitytheyliveinretirement.Iftheylivelongerin

retirement,theywillreceivemoreyearsofbenefits.

Longevity

Additional

contributions

Additional/matchingcontributionsusually

increasesthebenefitspromisedtoemployees.

Increasesliability

Higheremployeeturnovermeansfewer

Employee

turnover

Lowerliability

employeesarelikelytoworkthenumberofyears

ofservicerequiredforvestingofbenefits.

Insomecases,anincreaseinexpectedreturns

increasesthediscountrateusedforliabilities,

loweringliabilities.

Expected

investment

return

Potentially

Lowerliability

Ahigherdiscountratewillgivealowerpresent

valueofbenefits,hencealowerliability.

Discountrate

Lowerliability

20-95

DB:InvestmentHorizon

¾Theplanssponsor’sabilitytotoleratevolatilityofcontributionratesmay

impacttheinvestmenthorizon,andhencethepensionplan’sappetitefor

suchilliquidinvestmentsasprivateequityandventurecapital.

¾Anotherimportantfactordeterminingtheinvestmenthorizonisthemixof

activeplanparticipants(i.e.,currentemployees)versusretirees.

zThehighertheproportionofretireesrelativetotheproportionofactive

participants,themorematuretheplan—hence,theloweritsrisk

tolerance.

zSomematureDBpensionplanshavebeenfrozenastheytypically

experiencenegativecashflowwherebenefitpaymentsexceed

contributions.

¾Generally,themorematureapensionfund,theshorteritsinvestment

horizon,whichdirectlyaffectsrisktoleranceandtheallocationbetween

fixed-incomeassetsandriskierassets.

21-95

DB:RiskConsiderations

¾仾䲙ⴞḷ:DBplanⲴ仾䲙ᇩᗽᓖѫ㾱ਆߣҾ䇑ࡂⲴ⳸ҿ⣦ᘱˈਁ䎧ӪⲴ䍒

࣑⣦ߥ઼⳸࡙㜭࣋ˈਁ䎧Ӫ઼䘰Ձ䠁䇑ࡂส䠁Ⲵ仾䲙᳤䵢ޡᙗˈ䇑ࡂᵜ䓛⢩

ᖱ઼ࣣ࣋ࣘ⢩ᖱㅹˈ䈖㿱л㺘˖

Category

Variable

Explanation

Higherpensionsurplusor

higherfundedstatusimplies

greaterrisktolerance

Planfundedstatus

(surplusordeficit).

Planstatus

Lowdebtratiosandhigher

currentandexpected

profitabilityimplygreaterrisk

tolerance.

Largesponsorcompanysize

relativetopensionplansize

impliesgreaterrisktolerance.

Debttototalassets;

Currentandexpected

profitability;

Sizeofplancomparedto

marketcapitalizationof

sponsorcompany.

Sponsor

financial

statusand

profitability

22-95

DB:RiskConsiderations

Category

Variable

Explanation

Correlationof

sponsor

Sponsorand

pension

Thelowerthecorrelation,the

greaterrisktolerance,allelseequal.

fundcommonoperatingresultswith

riskexposures

pensionassetreturns.

Provisionforearly

Suchoptionstendtoreducethe

durationofplanliabilities,implying

lowerrisktolerance,allelseequal

retirement;

Planfeatures

Provisionforlump

sumdistribution.

Theyoungertheworkforce,the

greatertheproportionofactive

lives,thegreaterthedurationof

planliabilitiesandthegreatertherisk

tolerance.

Ageofworkforce;

Workforce

Activelivesrelativeto

characteristics

retiredlives.

23-95

DB:InvestmentObjective

¾TheprimaryobjectiveforDBpensionplansistomeetpensionliabilities

throughacombinationofinvestmentreturnsandcontributions.

¾Thesecondaryobjectivecouldbetominimizethepresentvalueof

expectedcashcontributions.

¾Computation

zIdeally,g=g.

A

L

9Where

‹g=Long-termrateofreturnonplanassets

A

‹g=actuarialdiscountrate

L

zUnderfunded,g>g;

A

L

zWhenconsidertheriskrelativetotheplansponsor’swillingnessand

abilitytoraisecontributionrates,g=g+riskpremium

A

L

24-95

DB:LiquidityNeeds

¾Pensionplansmustmaintainenoughliquiditytopaytheirliabilitiesasthey

comedue.Liquidityneedsaregenerallyhigherwhen:

zTheproportionofretiredlivesintheplanishigher,sinceretiredlives

arereceivingbenefitpayments.Frozenplanswillhavehigherliquidity

needsthannonfrozenplansduetobenefitsexceedingcontributions.

zTheworkforceoftheemployerisolder,sincethetimetopaybenefits

willbeshorter.

zTheplanhashigherfundedstatus,sincethiswilllikelyleadtolower

sponsorcontributionsandmorebenefitpaymentswillneedtobemet

fromexistingplanassets.

zTheplanparticipantshavetheabilitytoswitchorwithdrawfromthe

plan,aneventthatusuallytriggerspaymentstoparticipants.

25-95

DC:Stakeholders

¾Plansponsors(employers):notfacingtheinvestmentriskorlongevityrisk

oftheassets,retainimportantfiduciaryresponsibilities.Theseinclude

contributingtotheplan,overseeingtheinvestmentofplanassets,and

offeringsuitableinvestmentoptionstoplanparticipants.

¾Planbeneficiaries(employeesandretirees)facetheinvestmentriskof

contributionsandinvestmentreturnsnotmeetingretirementneeds.They

alsofacethelongevityriskoflivinglongerthanexpectedandoutlivingtheir

savings.

¾Theboardmustcommunicatewithparticipantstokeepthemwellinformed,

andthesecommunicationsmustconsidertheparticipants’levelof

sophistication.Theboardmayberequiredtoselectadefaultinvestment

optionwhenparticipantsaredisengaged.

¾Governmentsarestakeholdersinthattheyprovidetaxincentivesfor

employeestosaveforretirement,andtaxpayerswillultimatelyfacethe

costsofprovidingwelfareforthosethathavefailedtoadequatelysavefor

retirement.

26-95

DC:LiabilitiesandInvestmentHorizon

¾InaDCplan,participants’pensionbenefitsarebasedonamountscredited

totheirindividualaccountsintheformofcontributions(fromtheemployee

andpossiblytheemployer)andinvestmentreturns.

zConsequently,theliabilitiesofaDCpensionplansponsorareequal

onlytoitsrequiredcontributions.

¾TheDCplanmayinvestinabroadlydiversifiedportfoliothatmayinclude

investmentsnotgenerallyofferedtoretailinvestors,suchasprivateequity

andhedgefunds.

zThisispossiblesincepoolingofassetsgivesrisetoscaleandthe

long-termhorizonoftheaggregatebeneficiaries.

27-95

DC:LiabilitiesandInvestmentHorizon

¾ManyDCplansofferinvestmentoptionsthatallowparticipantstoselectthe

investmenthorizonthatbestalignswiththeirowninvestmenthorizon.

zExamplesarelife-cycleoptionsortargetdateoptions,whichfeaturea

glidepaththatmanagestheassetmixbasedonadesiredretirement

date.

zTherearetwomaintypesoflife-cycleoptions:

9Participant-switchingoptionsautomaticallyswitchmemberstoa

moreconservativeassetallocationastheyage.

9Participant/cohortoptionpoolstheparticipantwithother

investorswithasimilarretirementdateandthefundbeing

managedmoreconservativelyastheretirementdateisapproached.

28-95

DC:InvestmentObjectives

¾Themainobjectiveofdefinedcontributionpensionplansistoprudently

growassetsthatwillsupportspendingneedsinretirement.

zTheinvestmentoptionsofferedbytheDCplansponsorcanbe

managedeitherin-houseorexternallyaswellaspassivelyoractively.

¾Iftheplanoffersfundswithactivemanagement,asecondaryobjective

maybetooutperformthelong-termpolicybenchmarkconsistingofthe

weightedaverageofindividualassetclassbenchmarksandthepolicy

weightsdefinedbythestrategicassetallocation.

zForsomeDCplansitisimportanttheirinvestmentoptionsoutperform

thoseofotherDCpensionplans,whichisparticularlyrelevantin

countrieswhereparticipantscanvoluntarilyswitchbetweenDCplan

providers.

29-95

DC:LiquidityNeeds

¾Theprimarydriversofliquidityneedsaretheageoftheworkforceand

abilityofparticipantstoswitchorwithdrawfromtheplan.

zAsisthecaseforDBschemes,ifthesefactorsarehigh,thenliquidity

needsofthefundwillbehigh.

¾Itisimportantforpensionplanstoregularlyperformliquiditystresstests,

whichmayincludestressingthevalueoftheirassetsandmodellingreduced

liquidityofcertainassetclassesinamarketdownturn.

zSuchstress-testingmayalsohelpDCplansanticipatewhether

participantsmightswitchoutofmorevolatileinvestmentoptionsduring

marketdownturns.

30-95

DB&DC:ExternalConstraints

¾Regulationsvarybycountry;however,therearesimilarthemesinglobal

regulation.Manyregulatorsnowrequireextensivereportingonfeesand

costsincurredbyplansbothinternallyandexternally.

zInAustraliaandtheUnitedStates,thereisarequirementfortheplanto

offeradiversifieddefaultoptionforparticipants.

¾Fromataxperspective,rulesonceagainvarybycountry;however,pension

fundsareoftentreatedfavorablybygovernmentsinordertoencourage

individualstosaveforretirement.

zDCplansintheUnitedStates(referredtoas401(k)plans)aretax

deferred.Thismeansparticipantsmakepretaxcontributionsand

investmentearningsarenottaxable;however,benefitsaretaxedas

ordinaryincome.

¾Accountingrules,differbycountry.IntheUnitedStates,corporateDB

pensionplansmustfollowGAAP,particularlyAccountingStandards

Codification(ASC)715,Compensation—RetirementBenefits,whichrequires

thatfundedstatusbeshownasanassetorliabilityonthebalancesheet.

31-95

DB&DC:AssetAllocation

¾Anexaminationofpensionfund

assetallocationsshowsverylarge

differencesinaverageasset

allocationsbycountry.

zSuchinter-andintra-national

differencesaredrivenbymany

factorsdiscussedearlierinthis

reading,includingthe

differencesinlegal,regulatory,

accounting,andtax

constraints;theinvestment

objectives,riskappetites,and

investmentbeliefsofthe

stakeholders.

32-95

DB&DC:AssetAllocation

¾Itisapparentthattheallocationtoequitieshasdecreasedfromabout57%

in1997toabout46%in2017,whileallocationstothe‘Other’categoryof

alternativeshasincreasedfromabout4%to25%overthesametimeperiod.

¾Notethecategory‘Other’includeshedgefunds,privateequityfunds,loans,

structuredproducts,othermutualfunds(i.e.,notinvestedinequities,bonds,

orcash),land,buildings,andothermiscellaneousinvestments.

¾Withinequities,thereissomeevidenceofhomebiastodomesticequity

markets.

33-95

Example

¾FrankSmit,CFA,isCFOofcompanyA.CompanyAisasmallcompany

basedinAmsterdam,andallofitsrevenuescomefromEurope.

Productdemandhasbeenstronginthepastfewyears,althoughitis

highlycyclical.Thecompanyhasrisingearningsandastrong(low

debt)balancesheet.CompanyAisarelativelyyoungcompany,andas

such,itsdefinedbenefitpensionplanhasnoretiredemployees.This

essentiallyactive-livesplanhas€100millioninassetsandan€8million

surplusinrelationtotheprojectedbenefitobligation(PBO).Several

factsconcerningtheplanfollow:

zThedurationoftheplan’sliabilities(whichareallEurope-based)is

20years.

zThediscountrateappliedtotheseliabilitiesis6percent.

zTheaverageageofADSE’sworkforceis39years.

¾Basedontheinformationprovided,discussADSE’srisktolerance.

34-95

Example

¾Solution:

zADSEappearstohaveaboveaveragerisktoleranceforthe

followingreasons:

9Theplanhasasmallsurplus(8percentofplanassets);thatis,

theplanisoverfundedby€8million.

9Thecompany’sbalancesheetisstrong(lowuseofdebt).

9Thecompanyisprofitabledespiteoperatinginacyclical

industry.

9Theaverageageofitsworkforceislow.

35-95

2.SovereignWealthFunds(SWFs)

¾Sovereignwealthfunds(SWFs)arestate-ownedinvestmentfundsorentities

thatinvestinfinancialorrealassets.GovernmentshaveestablishedSWFs

frombudgetsurplusestomeetdifferentobjectives.

¾TheInternationalMonetaryFund(IMF)hasdefinedfivebroadtypesof

sovereignwealthfunds

Type

Objective

Examples

Setuptoinsulatethe

budgetandeconomyfromStabilizationFundofChile;

commoditypricevolatilityTimor-LestePetroleumFund;

EconomicandSocial

Budget

stabilization

funds

andexternalshocks.

Russia’sOilStabilizationFund

Establishedtoallocate

Developmentresourcestoprioritysocio-

Mubadala(UAE);Iran’sNational

DevelopmentFund;Ireland

StrategicInvestmentFund

funds

economicprojects,usually

infrastructure.

36-95

SovereignWealthFunds(SWFs)

Type

Objective

Examples

Intendedtosharewealth

acrossgenerationsby

AbuDhabiInvestment

Authority;KuwaitInvestment

Savingsfundstransformingnon-renewableAuthority;QatarInvestment

assetsintodiversified

financialassets.

Authority;Russia’sNational

WealthFund

Intendedtoreducethe

negativecarrycostsof

ChinaInvestmentCorporation;

ReservefundsholdingreservesortoearnKoreaInvestmentCorporation;

higherreturnonample

reserves.

GICPrivateLtd.(Singapore)

Setuptomeetidentified

futureoutflowswithrespectNationalSocialSecurityFund

Pension

topension-related

(China);NewZealand

reservefundscontingent-typeliabilitiesonSuperannuationFund;Future

governments’balance

sheets.

FundofAustralia

37-95

SWFs:Stakeholders

¾ThestakeholdersinanSWFareasfollows:

zCurrentandfuturecitizensbenefitfromthefund’ssuccesseither

directlythroughreceivingpaymentsorindirectlythroughlowertaxation

orincreasedinvestmentinthedomesticeconomy.

zInvestmentofficesinvestSWFassetseitherdirectlyin-houseor

appointexternalmanagers.

zTheboardhasafiduciarydutytotheultimatebeneficiariesofthe

fund.

zGovernmentsarestakeholdersinthattheymayrelyonSWFreturnsto

balancebudgetdeficits.

38-95

SWFs:LiabilitiesandInvestmentHorizons

¾Thereisawidevarietyininvestmentobjectives,liabilities,investment

horizons,andliquidityneedsamongthefivetypesofSWFs,sowewill

discusseachtypeseparately.

¾Budgetstabilizationfundsareestablishedtoinsulatethefiscalbudget

fromcommoditypricevolatilityandotherexternalshocks,particularlyifa

nation’srevenueistiedtonaturalresourceproductionorothercyclical

industries.

zThesefundshaveuncertainliabilitiesandrelativelyshortinvestment

horizons.Theirmainpurposeisriskmanagementbecausesuchfunds

maybeneededonashort-termbasistohelpsupportthegovernment

budget.

zTheinvestmentobjectiveisusuallytodeliverreturnsinexcessof

inflationwithalowprobabilityofanegativereturninanyyear.

39-95

SWFs:LiabilitiesandInvestmentHorizons

¾Developmentfundsareestablishedtosupportanation’seconomic

developmentthroughin