Chapter 15

Question 1

Factors influencing an institution’s investment strategy

Answer 1

Liabilities= Existing( Nature (real or nom), Currency , Term, Level of uncertainty in timing + amount) and Future (Future accrual like writing business or open pension funds)
*Assets= Size, In relation to liabilities, In absolute terms, E(Long-term) return, Need for diversification, Existing asset pf
*External Environment= Tax (Treatment of different investments , Tax position of investor), Statutory, legal or voluntary restrictions on how to invest, Accounting rules, Statutory valuation, Solvency requirements, Competitors (strategy followed by other funds)
*Environment, social and governance (ESG)
*Internal = Expenses, Risk appetite, Objectives

Question 2

Possible investment objectives

Answer 2

External environment = Matching or exceeding competitors, Meeting statutory solvency requirements
*Liabilities = Meeting them as they fall due (liquidity), Demonstrating there are sufficient assets available ongoing concern, Also on discontinuance, Controlling amount and timing of future obligations
*Returns= Tracking an index, Achieving pre-determined return

Question 3

When would an institutional investor be v. relaxed about volatile asset values?

Answer 3

No need to realise assets in near future
· No need to prove solvency on market value basis regularly
· Massive free assets
· No pressure to produce consistent short-term performance
· Perfectly matched assets and liabilities like unitised funds

Question 4

Constraints for investment of an individual

Answer 4

Excess of assets over liabilities quite small -Can’t take on that many risks
· More uncertain cfs (can be reduced by insurance)
· High relative expenses when investing small amounts
· Lack of info/expertise