Evaluate the portfolios held by a private DB pension plan, a sovereign wealth fund, a university endowment and a private foundation
The idea
Judge each portfolio against the investor's objectives and constraints. A DB plan's portfolio should hedge liability interest rate risk in proportion to its funded status and risk tolerance, with a return-seeking portion sized to the sponsor's strength. A sovereign wealth fund's allocation should match its purpose: liquid, short-duration assets for stabilisation or reserve funds, and growth and real assets for savings or development funds. An endowment can hold substantial alternatives if its horizon, governance and liquidity allow, with spending smoothed to reduce volatility. A private foundation typically faces a minimum annual payout and has no new inflows, so it needs more liquidity and less volatility than an endowment. The trap is evaluating allocations without reference to liabilities or spending.
In the app: 3 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
Take the free diagnostic →More in Portfolio Management for Institutional Investors
- Discuss the features that institutional investors typically share
- Discuss the investment policy approaches adopted by institutional investors
- Discuss for each type of institutional investor who has a stake in the portfolio, what it owes, how long it can invest and how much liquidity it needs
- Explain what the legal, regulatory and tax constraints on each type of institutional investor concentrate on
- Evaluate a private DB plan's risk profile in light of five factors: how well funded it is, the sponsor's financial strength, how the sponsor's business interacts with plan assets, plan design and the characteristics of the workforce
- Evaluate an institutional investor's investment policy statement
- Explain what shapes how banks and insurance companies manage their balance sheets