Choosing an appropriate investment strategy

Question 1

Types of objectives that the institutional investor aims to meet

Answer 1

1. Achieve a pre-specified target level of investment return/funding
2. Meet the labilities as they fall due
3. Matching/exceeding competitors
4. Satisfying the solvency requirement
5. Demonstrate that there are sufficient assets available should the provision of future benefit be discontinued
6. Controlling the timing and amount of future obligation
7. Tracking an index closely

Question 2

Relative performance risk

Answer 2

The risk of underperforming the competitors

Question 3

Examples of payments that are fixed in monetary terms

Answer 3

1. Repayment on fixed-rate mortgage
2. Long-term insurance contract/pension contributions/premiums
3. Other regular savings plan e.g. investment trust savings plan

Question 4

Advantages and disadvantages of collective investment schemes to personal investors

Answer 4

Advantages:
1. Diversification
2. Ease of investment
3. Tax benefits
4. Suitable for small fund
5. Expertise
Disadvantages:
1. large expenses
2. lack of control
3. different objectives between the investment fund and the individual