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Port Management for Institutional Investors (Common characteristics (Scale…
Port Management for Institutional Investors
Common characteristics
Scale
: small to very large
LT investment horizon
Regulatory framework
Governance framework
: investment committee + Board of directors
Principal-agent issues:
interest not aligned (external or internal)
Investment policy: mission objectives within guidlines
Implementation approaches
Norway model:
traditional style (60/40), low AI allocation, passive mgmt (low fees)
Endowment model:
high AI exposure, active mgmt. Suitable for long term investors. Higher fees for quality managers
Canada model:
high AI, in sourcing
LDI
: focus on hedging liabilities and interest rate risk
Sovereign Wealth Funds
State-owned investment funds (invest in real/financial assets)
Types
Budget stabilization
= insulate fiscal budget from commodity prices vol and external shocks
Development
= invest in socio-econ projects/infrastructure
Savings
= share wealth across generations
Reserve
= reduce negative carry costs of holding reserves
Pension reserve
Pension funds
DB
Payments
: defined by contract
Contributor
: Employer
Investment
decisions
: DB determines
Risk
: Employer
Mortality/Longevity
: mortality risk is pooled, employee has no longevity risk
Liability
= PV of all future payments (depends on years of service, final salary, life expectancy)
Investment Horizons
: volatility of contribution tolerable -> longer IH
Lower retired portion -> longer IH
Younger the active lives -> longer IH
Liquidity
:
Proportion of active retired: higher liquidity
age of workforce: older = higher liquidity
fund status = surplus => lower employer contribution > higher liquidity
particpant switching/witdrawals = allowed => higher liquidity
Risk
:
funded status= LDI, CF matching, duration matching (funded)
Underfunded= growth assets at higher rate, invest in more defensive assets, funded status variability (sponsor to make more contributions)
Sponsor financial strength = low => higher contri risk
sponsor and fund common risk exposure: correlation of sponsor results with asset returns high -> lower risk tolerance
Plan design: provision of early retirement/lum sum distribution => reduce duration/risk tol
workforce characteristics=> older workforce> higher liquidity
DC
Payments
: Determined by performance of fund
Contributor
: Employee
Investment decision
: Employee
Risk
: Employee
Employee bears longevity risk
Endowments/Foundations
Endowment = not subject to spending level
Foundation = required spending level
Banks & Insurance