Chapter 15: Choosing an appropriate investment strategy Flashcards
Ways of defining risk to institutional investors
- P robability of default
- R isk of underperforming compared with competitors - relative performance risk
- E xpected variability of return
- P robability of failing to meet an investor’s objectives
Examples of a fund’s objectives
- Being able to meet its liabilities as the fall due
- Proving that it will continue to do so on an ongoing basis - on a realistic and statutory basis.
- Proving that it could do so on an discontinuance basis
What influences the risk profile of an institution
- Nature of the institution
- Constraints of its governing body and documentation
- Legal or statutory controls
Main factors influencing a long-term investment strategy
- A ssets
- S tate dependent
- G eneral investment
- I nstitution dependent
- L iabilities
Main factors influencing a long-term investment strategy:
* Liabilities
* Assets
* Institution dependent
* State dependent
* General investment
Liabilities
* Currency
* Nature
* Term
* Level of uncertainty
* future accrual of liabilities
Assets
* The size of the assets - botjh in absolute terms as well as in relation to liabilities
* The existing asset portfolio
Institution dependent
* Risk appetite
* objectives
* The strategy followed by other funds
State dependent factors
* Tax and expenses - tax treatment of different investments as well as the tax position of the investor
* Statutory, legal or volunatary restrictions on how funds may investment
* Accounting rules
* Statutory valuation and solvency requirements
General investment
* The need for diversification
* Expected long-twem return from various asset classes
* Economic, social and governance considerations
Main factors influencing a long-term investment strategy:
* Liabilities
* Assets
* Institution dependent
* State dependent
* General investment
Liabilities
* Currency
* Nature
* Term
* Level of uncertainty
* future accrual of liabilities
Assets
* The size of the assets - botjh in absolute terms as well as in relation to liabilities
* The existing asset portfolio
Institution dependent
* Risk appetite
* objectives
* The strategy followed by other funds
State dependent factors
* Tax and expenses - tax treatment of different investments as well as the tax position of the investor
* Statutory, legal or volunatary restrictions on how funds may investment
* Accounting rules
* Statutory valuation and solvency requirements
General investment
* The need for diversification
* Expected long-twem return from various asset classes
* Economic, social and governance considerations
Main factors influencing a long-term investment strategy:
* Liabilities
* Assets
* Institution dependent
* State dependent
* General investment
Liabilities
* Currency
* Nature
* Term
* Level of uncertainty
* future accrual of liabilities
Assets
* The size of the assets - botjh in absolute terms as well as in relation to liabilities
* The existing asset portfolio
Institution dependent
* Risk appetite
* objectives
* The strategy followed by other funds
State dependent factors
* Tax and expenses - tax treatment of different investments as well as the tax position of the investor
* Statutory, legal or volunatary restrictions on how funds may investment
* Accounting rules
* Statutory valuation and solvency requirements
General investment
* The need for diversification
* Expected long-twem return from various asset classes
* Economic, social and governance considerations
Main factors influencing a long-term investment strategy:
* Liabilities
* Assets
* Institution dependent
* State dependent
* General investment
Liabilities
* Currency
* Nature
* Term
* Level of uncertainty
* future accrual of liabilities
Assets
* The size of the assets - botjh in absolute terms as well as in relation to liabilities
* The existing asset portfolio
Institution dependent
* Risk appetite
* objectives
* The strategy followed by other funds
State dependent factors
* Tax and expenses - tax treatment of different investments as well as the tax position of the investor
* Statutory, legal or volunatary restrictions on how funds may investment
* Accounting rules
* Statutory valuation and solvency requirements
General investment
* The need for diversification
* Expected long-twem return from various asset classes
* Economic, social and governance considerations
Main factors influencing a long-term investment strategy:
* Liabilities
* Assets
* Institution dependent
* State dependent
* General investment
Liabilities
* Currency
* Nature
* Term
* Level of uncertainty
* future accrual of liabilities
Assets
* The size of the assets - botjh in absolute terms as well as in relation to liabilities
* The existing asset portfolio
Institution dependent
* Risk appetite
* objectives
* The strategy followed by other funds
State dependent factors
* Tax and expenses - tax treatment of different investments as well as the tax position of the investor
* Statutory, legal or volunatary restrictions on how funds may investment
* Accounting rules
* Statutory valuation and solvency requirements
General investment
* The need for diversification
* Expected long-twem return from various asset classes
* Economic, social and governance considerations
Some of the constraints in the investment strategy of an institution
- Size of the assets - absolute
- Size of the assets - relative to liabilities
- Tax
- Demonstrating solvency
- Enviromental, social and governance considerations
Competitive reasons to maximise returns
- Attract new business
- Maximise shareholders’ returns
- Minimise the cost of providing for the liabilities
Main factors that an individual should consider before investing
- Their assets and liabilities and matching cashflows
Term
Currency
Nature
Uncertainty - Risk arising, in particular, the variability of market values
Diversification - Returns from different asset classes
Expenses
Tax
“feel good” factors - Constraints - investment and practical
What to consider when considering an investor’s financial postion
- Exisitng assets
- future income
- future spending
Constraints faced by individuals
Investment constraints
* Excess assets
* Uncertainty of future income and outgo
* Risk appetite
Practical constraints
* Not enough assets for direct investment in some investment classes
* high relative expenses when investing small amounts
* Lack of information/expertise
