14 - Choosing an Appropriate Investment Strategy Flashcards
How should investment objectives be specified?
Objectives should be framed in such a way which encompasses:
- The permitted degree of risk
- Required return
- Cashflow timing
Objectives of an insurer’s investment fund are:
- Meet liabilities as they fall due
- Prove that it will be able to meet liabilities on a realistic & statutory basis
- Prove that it can meet liabilities on a discontinuance basis as well
What is the definition of risk from the business perspective?
The probability of failing to achieve the investor’s objective.
What are possible objectives of institutional investors?
- Meeting liabs. as they fall due
- Achieving investment return or funding target
- Matching or exceeding competitors (to attract new customers)
- Tracking index as closely as possible
- Controlling the amt./timing of future obligations
- Satisfying statutory requirements
- Demonstrating solvency on discontinuance/ongoing bases
Risk appetite of an institution depends on:
- Nature of the institution (operating style eg. liquidity preference of banks)
- Constraints of governing body and legislation
- Legal or statutory controls
Factors influencing investment strategy:
ASSETS
- Size of assets in absolute terms &relative to liabs
- Existing asset portfolio
- Expected long term returns from various asset classes
LIABILITIES
- Nature
- Currency
- Term
- Level of uncertainty in amt./timing
- Future accrual
LEGISLATION
- Statutory, legal or voluntary restrictions on investment
- Statutory valuation & solvency requirements
- Tax treatment of investments/tax position of investors
- Accounting standards
EXTERNAL/MANAGEMENT
- Diversification needs
- Environmental, social, governance needs
- Strategy followed by other funds
- Institutions risk appetite
- Institutions objectives
Why would an institutional investor try to maximise investment returns?
- To maximise returns to shareholder
- Competitive reasons (to attract new business)
- To minimise cost of providing for liabilities
Main factors individuals should consider before investing are:
- Their assets and liabilities and matching cashflows
- Returns of different asset classes
- Risks arising from variability of market values
- Investment and practical constraints
What are considered as individual assets?
- Existing assets
- Future income
What are considered as the individual’s liabilities?
- Future spending
- Debt repayments eg mortgage, loans
When looking to maximise individual’s investment return, we need to consider:
- The expenses of dealing in the asset
- Risk appetite of the indvidual
- The individuals tax situation (tax efficiency)
- ESG considerations
- Feel good factors
What are the practical constraints of individual investors?
- Not enough assets for direct investments in some assets
- High relative expenses when investing small amounts
- Lack of information/expertise
(CIVs might be worth looking into to overcome these)
What are investment constraints of individual investors?
- the level of excess assets of the individual
- the uncertainty of future income and outgo of the individual
- the risk appetite of the investor
Individual considerations for risks arising from market variance:
- Stability of values is not as important when dealing with long-term investment horizons
- Diversification is important
Characteristics of individual investors’ assets and liabilities and matching cashflows to consider:
- Liabs are mostly real and domestic, so real, domestic assets are preferred
- Consider when asset proceeds are needed ie. when total expenditure > income
