Week 8

Question 1

Canada pension plan composition - Base CPP

Answer 1

Base CPP: traditional CPP, pension covers 25% of income, partially funded (only funded 40% liabilities)
- diversified portfolio of equities, fixed income, real asset. 85 equity / 15 debt

Question 2

Canada pension plan composition - Additional CPP

Answer 2

Establish to provide additional pension to 33% of employment income, contributions beginning in 2019
Desinged to be fully funded (assets must cover 100% of the liabilities)
- invest in 100% fixed income

Question 3

which pension (base vs additional) has a lower risk tolerance and why

Answer 3

addition cpp bc they have to cover 100% liabilies

Question 4

What is IPS

Answer 4

• required for most portfolio
• define the objective and constraint
• define strategic asset allocation or policy portfolio and diversification requirements
• serve as a legal and formal communication between client and manager
• governance is an important required component of policy statements

Question 5

what is the benchmark of a portfolio

Answer 5

The IPS: objective and constraint

Question 6

Strategic asset allocation is important?

Answer 6

Yes, explain the majority of variation in pension plan returns

Question 7

When do we adjust strategic allocations?

Answer 7

1. change in long-term financial market expectation
2. change in investor circumstances (eg. liabilities or risk tolerance)
3. availability of a new asset class

Question 8

examples of change to strategic allocation

Answer 8

life cycle investing
pension funds change their policy portfolio if avg age of plan members increases significantly, making liabilities bigger

Question 9

what is tactical allocation

Answer 9

change the portfolio relative to the policy portfolio to profit off of the short-term market outlook
use active management to outperform the policy portfolio over a market cycle

Question 10

risk in policy portfollio

Answer 10

the objective of asset managemnet is to fund the clients liabilities at an acceptable level of risk
risk is the probability of funding shortfall

Question 11

what is the benefit of big fund

Answer 11

can diversify because higher scale so can invest in high capital investment (eg. infrastructure) and more specialized managers

Question 12

what is active managers evaluate based off of?

Answer 12

their ability to outperform the policy portfolio using 2 techniques

Question 13

Techniques to tactical management

Answer 13

1. tactical asset allocation to outperform the policy portfolio
2. security selection to outperform the market index

Question 14

Tactical asset allocation in practice

Answer 14

1. develop a macro forecast 12- 18 months using probability weighted scenarios
2. evaluate current market valuations (price etc)
3. forecast expected return for various asset classes
4. use tactical asset allocation to adjust asst allocation incrementally, as markets unfold