Chapter 15 - Choosing an appropriate investment strategy

Question 1

List the steps in the cycle of implementing an investment strategy?

Answer 1

1) Assess regulatory and tax framework
2) Assess liabilities
3) Set objectives
4) Determine strategy for asset allocation
5) Construct portfolio
6) Select investment manager
7) Monitor portfolio and liabilities regularly

Question 2

List the ideal characteristics of investment objectives?

Answer 2

1) Clearly stated and specific
2) Quantified
3) Measurable

Question 3

List important things an investment objective should/could refer to?

Answer 3

1) Reference to the liabilities and their characteristics
2) Liquidity requirements
3) Required return (in absolute or real terms)
4) Risk appetite
5) Statutory regulation

Question 4

List the main interpretations of risk for institutional investors when considering an investment strategy?

Answer 4

1) Risk of default of assets
2) Variability of returns of assets
3) Risk of failing investment objectives (most practical interpretation)

Question 5

List the important factors determine the risk appetite of an institution?

Answer 5

1) Nature of the institution
2) The governing body and their constraints
3) Stakeholder expectations based on documentation
4) Statutory controls

Question 6

Who does the ultimate responsibility for a fund lie with for a:

1) Pension fund
2) Trust
3) Unit trust
4) Company
5) Charity

Answer 6

1) Trustees and sponsors
2) Trustees
3) Portfolio managers
4) Directors
5) Trustees

Question 7

List the main factors influencing an institution’s investment strategy? There are 17 points in total under 4 headings.

Read through pp.7-13 and make sure you can talk in more detail about these points.

Answer 7

1)  Liabilities
Nature of return
Currency
Term
Variability/Uncertainty of return timing and amount
Future accrual of liabilities

2) General environment
Tax treatment - for institution and stakeholders
Accounting rules
Statutory valuation and solvency requirements
Environmental, social and governance considerations (ESG)

3) Assets
Absolute and relative (to liabilities) size of assets
Expected long-term return from available asset classes
Existing portfolio
Need for diversification

4) Institution
Risk appetite
Expenses
Investment objectives
Competitors' strategies

Question 8

List the main factors an individual should consider before investing?

Read through pp. 14-21 and make sure you can go into more detail about each factor.

Answer 8

1) Matching asset and liability cashflows
2) Risk of variability and how to diversify this risk
3) Returns of different asset classes
4) Constraints