Instos

Question 1

Name the 5 types of institutional investos

Answer 1

Banks
Insurance
Pension Plans
Soverign Wealth Funds
Endowments

Question 2

5 common charecteristics of insto investors

Answer 2

Big Size
Long time horizon
Special regulatory framework
Defined governance structure
Potential principal agent conflicts

Question 3

What are some examples of sections on an insto IPS

Answer 3

Objectives
Constraints
Asset allocation (SAA)
Rebalancing policies
External constraints (tax)

Question 4

what are the 4 types of institutional allocation models

Answer 4

Yale, Norway, Canadian, Liability Driven

Question 5

Discuss (explain, adv disadv) the Yale model of asset allocation

Answer 5

The Yale model entails a high level of active portfolio management with a significant portion invested in alternative investments. The alternative investment management is outsources to Franklin Templeton.

Adv - potential to outperform
Dis adv - more costly, CAPACITY ISSUES FOR EXTERNAL INVESTMENT MANAGERS

Question 6

Discuss (explain, adv disadv) the Norway model

Answer 6

60/40 passive portfolio.

Adv - low tracking error, low costs
Disadv - no ability to outperform

Question 7

Discuss (explain, adv disadv) the Canadian model

Answer 7

The Same as the Yale model - high alts, active management BUT KEEPING THE INVESTMENT MANAGEMENT IN HOUSE(Like AUSTRALIAN SUPER WOULD HAVE A PRIVATE EQUITY ARM)

Adv - ability to outperform
Disadv - costly

Question 8

Explain a defined benefit plan, and how they can be over/under funded

Answer 8

It is a plan teachers etc. ussually get. Employees get paid an amount until death after thier time as an employee, ussually a % of thier final salary

It is the present Value of the assets (Like FAARB) - Present value of thier obligations

Question 9

Explain what an active and retired lives are

Answer 9

Active lives are employees still currently employed and are accumulating benefits to be paid later.

Retired lives are the people who are getting paid by the company

Question 10

Lets assume i am managing a pension plan - if there are more retired lives than active lives - what does that mean for my risk tolerance

Answer 10

Since there are more people recieving benefits, you would have a low risk tolerance - and be investing in lower risk securities. You’d also want more liquidity

Question 11

If the funded status of the plan is high (PV assets higher than liability), what does that mean for the risk tolerance of the fund

Answer 11

You can take more risk

Question 12

Let’s imagine that i work at BHP - and the pension plan invests mostly in coal and gas securities - what does this mean for the risk tolerance of my pension plan

Answer 12

Since the plan’s assets are closely correlated with the operating profits of the firm, if the industry went down bad - the fund would go down in value, and the firm might not have the operational capability to make the payments they are obligated to to beneficiaries - you’d wanna invest in lower risk things

Question 13

What would a provision for early retirement in a pension plan do to the risk tolerance of a pension fund

Answer 13

Reduce it - early retirement means more liquidity needs

Question 14

How does active v retired lives effect liquidity needs of a pension plan

Answer 14

More retired lives means more need for liquidity.`

Question 15

Name the 5 types of Soverign wealth plans

Answer 15

Budget Fund
Development
Ssavings
Reserve
Pension

Question 16

What is a budged fund soverign wealth fund - and explain its charecteristivs

Answer 16

It is a fund that is used to shelter the wider economy from a significant downturn IF the currency/economy is closely tied to a commodity.

So like in Australia, we have a close correlation to iron ore - so we have a fund to counter the effect of a slowdown in iron ore.

IT INVESTS IN CASH or CASH EQUIVILENTS - low risk and highly liquid

Question 17

Development soverign wealth plan - explain it

Answer 17

It is a plan used to fund a particular project . so the duration and liquidity needs are determinant of the project itself

Question 18

Savings soverign wealth fund - explain it

Answer 18

It is pretty much an account for the government - and can invest in long term projects and doesnt need much liquidity

Question 19

Reserve fund - what is it and what is it for?

Answer 19

It is for reducing the cost of carry of foreign currencies - investing the reserves for higher returns in equities

Question 20

What sort of Asset allocation strategy does the pension plan and savings plan of soverign wealth funds use

Answer 20

The endowment/YALE asset allocation plan - which is high alts and external manager.

Question 21

What is the goal of an endowment

Answer 21

To fund thier operating costs - like a university fund is there to make sure the university keeps on emplying professors and building classrooms

Question 22

What is the tax structure of soverign wealth funds

Answer 22

Tax exempt

Question 23

What is the investment horizon of a endowment

Answer 23

Perpetual

Question 24

What is the tax structure of endowments

Answer 24

Tax exempt

Question 25

What sort of asset allocation strategy do endowments use

Answer 25

Yale model

Question 26

Fodundations - how much of thier profits need to be paid out each year – and how does this effect its asset alloaction

Answer 26

5%

This means that they need a portion of liquid assets to meet this quota, or it will lose its tax exempt status

Question 27

Banks - what are the liquidity needs and why

Answer 27

The liquidity needs are very high - why? Because, thier assets are long dated mortgages which are very illiquid - thereofre to increase the liquidity of the overall firm, you need to invest in liquid assets to keep your liquidity coverage ratioss high as mandated by the feds.

Question 28

NOTE TO SELF - listen mate - when doing questions on Pension plans - just remember that there should be a duration match of the liabilities against the assets, and that the assets should be measured against those liabilities

Answer 28

Free point