15. Choosing an appropriate investment strategy

Question 1

Investment objectives of institutional investors

Answer 1

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

Question 2

Definition of risk from an investment management perspective

Answer 2

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)

Question 3

Considerations when defining risk

Answer 3

1. Time period
2. Real/nominal returns
3. Currency

Question 4

Risk appetite is influenced by

Answer 4

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

Question 5

Factors affecting investment strategy: Institutions

COLD-R

Answer 5

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

Question 6

Factors affecting investment strategy: Individuals

ARRI

Answer 6

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

Question 7

Why institutions seek to maximise returns

Answer 7

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