Chapter 25: Investment strategy - Institutions Flashcards

1
Q

4 Definitions of Risk

A
  • probability of default
  • expected variability of return
  • risk of underperforming compared with competitors
  • probability of failing to achieve the investor’s objectives.
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2
Q

4 items influencing risk appetite of an institution

A
  • nature of the institution
  • constraints of its governing body and documentation (trust deed & rules, p/h documentation)
  • legal or statutory controls
  • level of free assets
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3
Q

4 Main features of liabilities that influence investment strategy

A
  • nature
  • term
  • currency
  • degree of uncertainty in timing and amounts
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4
Q

Nature of a liability

A

whether or not they are subject to inflationary increases.

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5
Q

15 Key factors influencing investment strategy

A

S - Size of the assets, (in relation to liabilities and in absolute terms)
T - Tax (both treatment of the asset and the investor)
R - Risk appetite of the institution
E - Existing asset portfolio
S - Statutory valuation and solvency requirements
S - Strategy followed by other funds
E - Expected long-term return from various asset classes
D - Need for DIVERSIFICATION

F - Future Accrual of Liabilities
O - Objectives of the institution
R - Restrictions (statutory, legal or voluntary) on how the fund may invest.
T - Term of the existing liabilities
U - Level of UNCERTAINTY of the existing liabilities (both in amount and timing)
N - Nature of existing liabilities
E - Currency of Existing liabilities

+
Accounting Requirements
Environmental, Social and Governance considerations

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6
Q

2 Main factors governing the institution’s preference for income or capital growth from their investments

A
  • Tax

- Cashflow requirements

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7
Q

Tactical asset allocation

A

Departure from the benchmark position in an attempt to maximise return.
this may conflict with the minimisation of risk.

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8
Q

5 Factors to be considered before making a TACTICAL ASSET SWITCH

A
  • level of the free assets
  • expected extra return to be made relative to the additional risk
  • constraints on the changes that can be made to the portfolio
  • expenses of making the switch
  • problems of switching a large portfolio of assets
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9
Q

Principal aim of an investing institution

A

To meet its liabilities as they fall due.

the overriding need is to minimise risk.

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10
Q

5 Possible objectives of a fund

A
  • Meeting liabilities as and when they fall due
  • Demonstrating solvency (on an ongoing, statutory and discontinuance basis)
  • Minimising the burden on 3rd parties eg. trying to reduce the amount an employer has to contribute to a pension fund by taking aggressive investment strategy
  • Maximise returns
  • Outperform competitors
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11
Q

Relative performance risk

A

The risk of underperforming ones competitors

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12
Q

4 Groups of people who decide on the risk tolerance of different types of institutions:

A
  • trustees (of trusts)
  • members (of DC pension funds)
  • directors (of companies)
  • donators (of charities)
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13
Q

4 Common problems of switching large portfolios

A
  • Shifting market prices
  • Timing issues
  • Dealing costs
  • Capital Gains Tax liability crystallizes
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14
Q

2 Different sets of liabilities to match simultaneously

A
  • the liabilities that they need to meet on an ongoing basis

- a statutory basis for proving solvency

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