Chapter 25: Investment Strategy - Institutions Flashcards

1
Q

How should an institutions investment objective be framed?

A

In terms of:

  • required return
  • allowable level of risk
  • timing of the cashflows
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2
Q

Examples of objectives of a pensions scheme

A
  • to meet liabilities as they fall due
  • to control the sponsor’s future contribution rate
  • to have sufficient assets to meet liabilities on an ongoing basis
  • to have sufficient assets to meet liabilities if the scheme discontinues
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3
Q

Examples of what the word “risk” might mean

A
  • standard deviation of investment returns
  • probability of complete ruin
  • probability of failing to meet the investor’s objective
  • risk of underperforming competitors.
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4
Q

Institutional risk appetite depends on (4)

A
  • nature of the institution
  • constraints of its governing body
  • documentation
  • legal or statutory controls
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5
Q

15 Main factors that will influence a long-term investment strategy

A
  • nature
  • term
  • currency
  • uncertainty
    of existing liabilities
  • future accrual of liabilities
  • expected long-term return of various asset classes
  • tax treatment of different assets and of the investor
  • statutory, legal or voluntary restrictions on the investor
  • valuation and solvency requirements
  • the size of the assets in absolute terms and relative to the liabilities
  • the existing portfolio
  • strategy followed by peers
  • risk appetite of the institution
  • institution’s objectives
  • the need for diversification
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6
Q

Why might some investors prefer a low income-yielding assets to high income-yielding assets?

A

There is less income to have to worry about reinvesting (which reduces dealing costs)

Some investors may have little short-term outgo to meet.

Low income-yielding assets may appeal to institutions that pay a high level of income tax relative to capital gains tax.

Low income-yielding assets tend to be more volatile than high income-yielding assets since they have a longer discounted-mean term.
This may appeal to:
- longer-term investors,
- risk seekers,
- investors with significant free assets,
- investors who don’t need to worry about demonstrating solvency on a market value basis.

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7
Q

What should you take into account when selecting individual investments in relation to the existing portfolio.

A

the covariance of the return with the assets in the existing portfolio, and hence the level of diversification and specific risk in the portfolio.

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8
Q

What is meant by a tactical asset allocation?

A

a short-term deviation from the long-term strategy in an attempt to maximise returns.

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9
Q

Factors to consider when making a tactical asset allocation

A
  • extra dealing expenses
  • risk of shifting asset prices by switching a large amount of assets
  • constraints of changes that can be made to the portfolio
  • whether the extra expected return outweighs the additional risk
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