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33-1 portfolio management for institutional investors (5 sovereign …
33-1 portfolio management for institutional investors
1 introduction
large comple sophisticated
3 overview
of
investment
policy
investment policy statemetn - IPS
establishes policcies and procedures for effective administration and managemetn of institutional assets
mission and investemnt objectives / constraints / asset allocation policy / rebalancing policy / guidelines / reporting reguirements
four
different
approaches
Norway model:
almost exclusive reliance on public equities and fixed income
usually managed with tight tracking error limits
endowment model:
high allocation to alternative investments, significant active management and externally managed assets
long-term, high risk tolerance, small liquidity needs and skill in sourcing alternative invesments
Canada model: high allocation to alternatives; relies more on internally managed assets //
referenca portfolio / total portfolio approach / active management
liability driven investing LDI model:
to generate returns sufficient to cover liabilites
max expected surplus return and managing surplus volatility
significant exposure to long duration fixed-income securities
5
sovereign
wealth
funds
stakeholders
the citizens / government / external asset managers / SWF management, investment committees adn boards
liability
and
investment
horizon
not generally have clearly defined liabilities
budget stabilization funds
uncertain liabilities and relatively short investment horizons
main purpose - risk management
to deliver return in excess of inflation with low probability of negative return in any year
mainly invest in government bonds and other debt securities
development funds
implicit real return target - to increase real domestic GDP growth and productivity
savings funds
a real return objective or an explicit spending policy
invest in risky and illiquid assets
reserve funds
in higher yielding risky assets / diversified portfolios
pension reserve funds
to earn sufficient to max likelihood of meeting future pension, social security and/or health care costs
invest in a diversified portfolio
liquidity
needs
budget stabilization funds
high level and low riks of significant losses over short periods
development funds
depend on created to support
savings funds
very long-term and low liquidity needs
reserve funds
lower than stabilization but higher than saving
pension reserve funds
change over time
investment
objectives
budget stabilization funds
capital preservation, in excess of inflation with low of negative
development funds
to achieve a real rate in excess of real domestic GDP or productivity growth
savings funds
to maintain purchasing power of asset in perpetuity
reserve funds
to achieve a rate of return above return pay on its moenetary stabilization bonds
pension reserve funds
asset
allocation
budget stabilization - dominated by fixed-income
savings - tilted toward growth assets equities and alternatives
reserve - similar allocation to savings but less to alternatives
pension reserve - heavily tilted toward equities with significant to alternative
major
type
budget stabilization funds: to insulate the budget and economy from commodity price volatility and external shocks
development funds: to allocate resources to priority socio-economic projects - infrastructure
savings funds:
to share wealth across generations by transforming non-renewabel assets into diversified financial assets
reserve funds:
to reduce nagative carry costs of holding reserves or to earn higher return on ample reserves
pension reserve funds:
to meet identified future outflows with respect to pension-related contingent-type liabilites on government's balance sheets
external
constraints
legal and
regulatory
sound governance independence
transparency and accuntability
self-governing body -
the international forum of SWFs (IFSWF)
the santiago principles
tax and
accounting
typically given tax-free status by legislation
2 institutional
investors:
common
characterictics
pricipal-
agent
issues
arises if one person - the agent makes decision on behalf of another - principal, and their interests not aligned
example - performance fee structures
→highly developed governance models and high level of accountability with a board and/or investemtn committee overseeing
governance
framework
a board of directors / an investment committee
to manage
assets internally
size of assets under management
capability of internal resources
desire to pursue custom strategies
not readily offered by external
regulatory
frameworks
key drivers:
investor protection, safety and soundness of financial institutions and integrity of financial markets
long-term
investment
horizon
and relatively low liquidity needs
*bank and insurance -
tend to much asset/liability focused
scale
diversified / high min size / skilled professionals
dis-economies
of scale:
unable to invest in certain niche inestments
unable to deploy as much capital as desired
face costs of marekt impact
rapidly growing →high cash inflow