Investment Strategy Flashcards
What are the 2 principles of investment?
Liabilities and Assets
Liabilities - Select investments appropriate to the liabilities nature, term and currency and the risk appetite of the provider
Assets - Subject to the liabilities part, maximise overall return on assets (income and capital growth)
8 limitations of investments caused by Regulation
CAMP CAT ME
Currency to match A and L
Amounts of specifics asset used for solvency demonstrations
Mismatch reserve needed
Proportions of particular assets needed e.g. gilts
Custodianship of assets
a
Type of asset
Mismatching limit to the extent of it
Exposure to counterparty limits
What is mismatching?
Holding assets that don’t match the nature of liabilities
Factors effecting investment strategy?
SOUNDER TRACTORS
Size of assets (absolute and relative) Objectives Uncertainty to liabilities Nature of liabilities Diversification Existing portfolio Return (expected long-term)
Tax treatment of assets/investor Restrictions (legal, stat, voluntary) Accrual of liabilites Currency of existing liabilities Term of existing liabilities Other funds' strategies (competitors) Risk appetite Solvency requirements
How can you split the investment strategy factors?
Assets/liabs/regulation/company
What liability factors effect inv. strategy
Fixed/variable (nature) real/not real currency term uncertainty in amount uncertainty in term future accrual size vs assets
What regulatory things effect inv strat
Tax of investments and company
valuation requirements
solvency requirements
restrictions (legal/stat/voluntary) on how fund invests
What assets factors effect investment strategy?
Size of assets, absolute and relation to liabs
Expected long term return
excisting portfolio
diversification?
What company factors/ideas effect inv strategy
Strategy followed by other funds
risk appetite
objectives
What 2 particular things should you look at in matching guaranteed liabiltiles?
Term and probability of payments
How to invest if inflation linked guarantees?
Index linked securities
match expected term of liablility outgo
How to invest if discretionary benefits?
Asset to provide highest expected return subject to policyholder reasonable expectations
How to invest if investment-linked guaranteed liablitiles
Invest in assets relelevant to the specific formula guarantees are based on
might use collective investment scheme on ftse or derivatives
How else can you invest if guaranteed liabilties
Immunisation
If you have a large surplus and guranteed monetary benefits, how/why do you invest it?
Use as solvency cushion
mismatch policy
mismatching reserve
finance capital growth and other projects
If you have large free surplus and investment-linked liabilities, how do you invest?
can’t mismatch due to all risk being then on the policyholder and all profits to you
If you have a large surplus and discretionary benefits, how do you invest it?
mismatching
buffer against insolvency
limited matching to keep defined benefit level
as long as you take into account p/h reasonable expectations in terms of amoutn recieved and level, then do what you want, if in regulations
What types of benefit payments are there?
Guaranteed in money terms
Guaranteed to an index of prices/earnings or similar
Investment-linked
Discretionary
What’s the net liability outgo formula?
benefit payments+expense outgo (linked to index) - prem/contribution income (fixed or linked)
What things do individuals suffer from that companies don’t when investing?
Size of expenses relative to investment
lack of info/expertise
not enough assets for direct investment to some classes
Describe active management
Red Jellyfish Replay Cute Ideas
Restrictions on investments decrease
Judgement used for future long/short term performance on individual investments
Returns should be greater
Costs of extra transactions offset the greater returns
Judgements can be incorrect
Describe passive management
Beautiful recipes tickle books
Benchmarked, so hold assets to reflect it
Restricted freedom
Tracking errors possible
Bad performance of index possible
What are the 2 ypes of tracking error measurment?
Prospective (forward looking) and Restrospective (backward looking)
Explain retrospective tracking error
Annualised SD of difference between portfolio and benchmark RETURN
