Chapter 3: The investment framework of the institution

Question 1

2. Actuarial risk

Answer 1

the probability of failing to achieve the investor’s objective.

Question 2

The main factors that will influence a long-term investment strategy are:

Answer 2

• The nature of the existing liabilities: are they fixed in monetary terms, real, or varying in some other way?
• The currency of the existing liabilities
• The term of the existing liabilities
• The level of uncertainty of the existing liabilities, both in amount and timing
• Tax, both the tax treatment of different investments, and the tax position of the investor must 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
• The expected long-term return from various asset classes
• Statutory valuation and solvency requirements
• Future accrual of liabilities
• The existing portfolio, including its liquidity
• The strategy followed by other funds
• The amount of risk that the investor is prepared to take
• The investor’s objectives.

Question 3

Factors to be considered before making a tactical asset switch are:

Answer 3

• The expected extra returns to be made relative to the additional risk (if any)
• Constraints on the changes that can be made to the portfolio
• The expenses of making the switch
• The problems of switching a large portfolio of assets
• The ability to switch back to the long-term benchmark when required