15. Choosing an appropriate investment strategy Flashcards Preview

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Flashcards in 15. Choosing an appropriate investment strategy Deck (7)
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1
Q

Investment objectives of institutional investors

A
  1. Meet future liabilities as they fall due
  2. Control incidence of future obligations on a 3rd party
  3. Achieve pre-specified level of return/funding
  4. Matching/exceeding competitors
  5. Tracking an index as closely as possible
  6. Solvency requirements
  7. Demonstrate that there are enough assets if future benefits discontinue
2
Q

Definition of risk from an investment management perspective

A
  1. Probability of an investment failing completely
  2. Signifies the expected variability of return from an investment
  3. Failing to achieve investment objectives (most practical)
3
Q

Considerations when defining risk

A
  1. Time period
  2. Real/nominal returns
  3. Currency
4
Q

Risk appetite is influenced by

A
  1. Nature of the institution
  2. Constraints of its governing body and documentation
  3. Legal/statutory controls
5
Q

Factors affecting investment strategy: Institutions

COLD-R

A

Liabilities

  • Nature
  • Currency
  • Term
  • Uncertainty
  • Future accrual

Return
- Expected long term return from various asset classes

Constraints

  • Tax and expenses
  • Statutory, legal or voluntary restrictions
  • Size of assets in relation to liabilities and in absolute terms
  • Statutory valuation and solvency requirements

Diversification

Other

  • Accounting
  • Existing portfolio
  • Competitors’ strategies
  • Risk apppetite
  • Objectives
6
Q

Factors affecting investment strategy: Individuals

ARRI

A
  1. Assets, liabilities and matching cashflows
  2. Risk
  3. Returns from different asset classes
  4. Investment and practical constraints
7
Q

Why institutions seek to maximise returns

A
  1. Attract new business
  2. Maximise shareholders returns
  3. Minimise the cost of providing liabilities