Chapter 15 - Choosing an Appropriate Investment Strategy

Question 1

Institutional Risk Appetite

Answer 1

Institutional Risk appetite depends on:
- nature of the institution
- constraints of its governing body and documentation
- legal or statutory controls

Question 2

Factors affecting Institutional Investment Strategy

Answer 2

Liabilities
- nature of the existing liabilities (whether they are fixed in monetary terms, real or varying in some other way)
- currency of the existing liabilities
- term of the existing liabilities
- the level of uncertainty of the existing liabilities – both in amount and timing
- future accrual of liabilities

External Environment
- tax and expenses (both the tax treatment of different investments and the tax position of the investor need to be considered)
- statutory, legal or voluntary restrictions on how the fund may invest the size of the assets, both in relation to the liabilities and in absolute terms
- accounting rules
- statutory valuation and solvency requirements
- environmental, social and governance (ESG) considerations

Internal
- existing asset portfolio
- strategy followed by other funds
- institution’s risk appetite
- institution’s objectives
- need for diversification
- expected long-term return from various asset classes