Chapter 24 Portfolio Management: Instutional

Question 1

Accumulation phase

Answer 1

Phase where the government predominantly contributes to a sovereign wealth pension reserve fund.

Question 2

Canada model

Answer 2

Characterized by a high allocation to alternatives. Unlike the endowment model, however, the Canada model relies more on internally managed assets. The innovative features of the Canada model are the: a) reference portfolio, b) total portfolio approach, and c) active management.

Question 3

Decumulation phase

Answer 3

Phase where the government predominantly withdraws from a sovereign wealth pension reserve fund.

Question 4

Defined benefit

Answer 4

A retirement plan in which a plan sponsor commits to paying a specified retirement benefit.

Question 5

Defined contribution

Answer 5

A retirement plan in which contributions are defined but the ultimate retirement benefit is not specified or guaranteed by the plan sponsor.

Question 6

Demand deposits

Answer 6

Accounts that can be drawn upon regularly and without notice. This category includes checking accounts and certain savings accounts that are often accessible through online banks or automated teller machines (ATMs).

Question 7

Endowment model

Answer 7

Characterized by a high allocation to alternative investments (private investments and hedge funds), significant active management, and externally managed assets.

Question 8

General account

Answer 8

Account holding assets to fund future liabilities from traditional life insurance and fixed annuities, the products in which the insurer bears all the risks, particularly mortality risk and longevity risk.

Question 9

Liability driven investing (LDI) model

Answer 9

In the LDI model, the primary investment objective is to generate returns sufficient to cover liabilities, with a focus on maximizing expected surplus return (excess return of assets over liabilities) and managing surplus volatility.

Question 10

Limited-life foundations

Answer 10

A type of foundation where founders seek to maintain control of spending while they (or their immediate heirs) are still alive.

Question 11

Liquidity budget

Answer 11

The portfolio allocations (or weightings) considered acceptable for the liquidity categories in the liquidity classification schedule (or time-to-cash table).

Question 12

Liquidity classification schedule

Answer 12

A liquidity management classification (or table) that defines portfolio liquidity “buckets” or categories based on the estimated time it would take to convert assets in that particular category into cash.

Question 13

Mission-related investing

Answer 13

Aims to direct a significant portion of assets in excess of annual grants into projects promoting a foundation’s mission.

Question 14

Norway model

Answer 14

Characterized by an almost exclusive reliance on public equities and fixed income (the traditional 60/40 equity/bond model falls under the Norway model), with largely passively managed assets and with very little to no allocation to alternative investments.

Question 15

Participant/cohort option

Answer 15

Pools the DC plan member with a cohort that has a similar target retirement date.

Question 16

Participant-switching life-cycle options

Answer 16

Automatically switch DC plan members into a more conservative asset mix as their age increases. There may be several automatic de-risking switches at different age targets.

Question 17

Reserve portfolio

Answer 17

The component of an insurer’s general account that is subject to specific regulatory requirements and is intended to ensure the company’s ability to meet its policy liabilities. The assets in the reserve portfolio are managed conservatively and must be highly liquid and low risk.

Question 18

Separate accounts

Answer 18

Accounts holding assets to fund future liabilities from variable life insurance and variable annuities, the products in which customers make investment decisions from a menu of options and themselves bear investment risk.

Question 19

Surplus portfolio

Answer 19

The component of an insurer’s general account that is intended to realize higher expected returns than the reserve portfolio and so can assume some liquidity risk. Surplus portfolio assets are often managed aggressively with exposure to alternative assets.

Question 20

Term deposits

Answer 20

Interest-bearing accounts that have a specified maturity date. This category includes savings accounts and certificates of deposit (CDs).

Question 21

Time deposits

Answer 21

Interest-bearing accounts that have a specified maturity date. This category includes savings accounts and certificates of deposit (CDs).

Question 22

Time-to-cash table

Answer 22

Liquidity classification schedule liquidity management classification (or table) that defines portfolio liquidity “buckets” or categories based on the estimated time it would take to convert assets in that particular category into cash.

Question 23

Vesting

Answer 23

A term indicating that employees only become eligible to receive a pension after meeting certain criteria, typically a minimum number of years of service.

Question 24

Disintermediation

Answer 24

Occurswhen individuals remove their funds from financial intermediaries. With regard to life insurance companies, this involves loans, withdrawals and outright surrenders.