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1、一鼠ll裕lf您IIIVHO1KevinKrollisthechairoftheinvestmentcommitteeresponsibleforthegovernanceoftheShireManufacturingCorporation(SMC)definedbenefitpensionplan.Thepensionfundiscurrentlyfullyfundedandhasfollowedanassetmixof60%publicequitiesand40%bondssinceKrollhasbeenchair.KrollmeetswithMaryPark,anactuarialan
2、dpensionconsultant,todiscussissuesraisedatthelastcommitteemeeting.Krollnotesthattheinvestmentcommitteewouldliketoexplorethebenefitsofaddingalternativeinvestmentstothepensionplansstrategicassetallocation.Krollstates:Statement1Thecommitteewouldliketoknowwhichalternativeassetwouldbestmitigatetherisksto
3、theportfolioduetounexpectedinflationandalsohavearelativelylowcorrelationwithpublicequitiestoprovidediversificationbenefits.ATheSMCpensionplanhasbeenabletofundtheannualpensionpaymentswithoutanycorporatecontributionsforanumberofyears.Thecornitteeisinterestedinpotentialchangestotheassetmixthatcouldincr
4、easetheprobabilityofachievingthelong-terminvestmenttargetreturnof5.5%whilemaintainingthefundedstatusoftheplan.Parknotesthatfixed-incomeyieldsareexpectedtoremainlowfortheforeseeablefuture.Krollasks:AStatement2Ifthepublicequityallocationremainsat60%,isthereasingleassetclassthatcouldbeusedforthebalance
5、oftheportfoliotoachievethegreatestprobabilityofmaintainingthepensionfundingstatusoveralongtimehorizon?Underthishypotheticalscenario,thebalanceoftheportfoliocanbeallocatedtoeitherbonds,hedgefunds,orprivateequities.HAParkconfirmswithKrollthatthecommitteehashistoricallyusedatraditionalapproachtodefinet
6、heopportunitysetbasedondistinctmacroeconomicregimes,andsheproposesthatarisk-basedapproachmightbeabettermethod.Althoughthetraditionalapproachisrelativelypowerfulforitsabilitytohandleliquidityandmanagerselectionissuescomparedtoarisk-basedapproach,theybothacknowledgethatanumberoflimitationsareassociate
7、dwiththeexistingapproach.AParkpresentsareport(Exhibit1)thatproposesanewstrategicassetallocationforthepensionplan.Krollstatesthatoneoftheconcernsthattheinvestmentcommitteewillhaveregardingthenewallocationisthatthepensionfundneedstobeabletofundanupcomingearlyretirementincentiveprogram(ERIP)thatSMCwill
8、beofferingtoitsemployeeswithinthenexttwoyears.Employeeswhohavereachedtheageof55andwhoseageaddedtothenumberofyearsofcompanyservicesumto75ormorecanretire10yearsearlyandreceivethedefinedbenefitpensionnormallypayableatage65.1Exhibit1ProposedAssetAllocationofSMCDefinedBenefitPensionPlanPublicEquitiesBroa
9、dFixedIncomeHedgeFundsPublicRealEstateTotal45%25%10%10%100%35%-55%15%-35%0%-12%0%-12%AKrollandParkthendiscusssuitabilityconsiderationsrelatedtotheallocationinExhibitLKrollunderstandsthatoneofthedrawbacksofincludingtheproposedalternativeassetclassesisthatdailyreportingwillnolongerbeavailable.Investme
10、ntreportsforalternativeswilllikelybereceivedaftermonthlyorquarter-enddeadlinesusedfortheplanstraditionalinvestments.Parkemphasizesthatinatypicalprivateequitystructure,thepensionfundmakesacommitmentofcapitaltoablindpoolaspartoftheprivateinvestmentpartnership,cfafrmcpacmavideo,weixin:804283381AInorder
11、toexplainthenewstrategicassetallocationtotheinvestmentcommittee,KrollasksParkwhyariskfactor-basedapproachshouldbeusedratherthanamean-variance-optimizationtechnique.Parkmakesthefollowingstatements:Statement3Riskfactor-basedapproachestoassetallocationproducemorerobustassetallocationproposals.Statement
12、4Amean-varianceoptimizationtypicallyoverallocatestotheprivatealternativeassetclassesduetostalepricing.Parknotesthatthecurrentmacroeconomicenvironmentcouldleadtoabearmarketwithinafewyears.KrollasksParktodiscussthepotentialimpactonliquidityplanningassociatedwiththeactionsofthefund,sgeneralpartnersinth
13、eforecastedenvironment.HAKrollconcludesthemeetingbyreviewingtheinformationinExhibit2pertainingtothreepotentialprivateequityfundsanalyzedbyPark.Parkdisclosesthefollowingduediligencefindingsfromarecentmanagersearch:FundAretainsadministrators,custodians,andauditorswithimpeccablereputations;FundBhasachi
14、eveditsperformanceinamannerthatappearstoconflictwithitsreportedinvestmentphilosophy;andFundChasrecentlyexperiencedthelossofthreekeypersons.Exhibit2PotentialPrivateEquityFunds,InternalRateofReturn(IRR)PrivateEquityFundFundAFundBFundC5-yearIRR12.9%13.2%13.1%4N1ABasedonStatement1,Parkshouldrecommend:A.
15、hedgefunds.B.privateequities.C.commodityfutures.1Realassets(whichincludeenergy,infrastructure,timber,commodities,andfarmland)aregenerallybelievedtomitigatetheriskstotheportfolioarisingfromunexpectedinflation.Commoditiesactasahedgeagainstacoreconstituentofinflationmeasures.Ratherthaninvestingdirectly
16、intheactualcommodities,commodityfuturesmaybeincorporatedusingamanagedfuturesstrategy.Inaddition,thecommitteeislookingforanassetclassthathasalowcorrelationwithpublicequities,whichwillprovidediversificationbenefits.Commoditiesareregardedashavingmuchlowercorrelationcoefficientswithpublicequitiesthanwit
17、hprivateequitiesandhedgefunds.Therefore,commoditieswillprovidethegreatestpotentialtofulfilltheindicatedroleandtodiversifypublicequities.HAInansweringthequestionraisedinStatement2,Parkwouldmostlikelyrecommend:A.bonds.HWhenprojectingexpectedreturns,theorderofreturnsfromhighesttolowestistypicallyregard
18、edasprivateequities,hedgefunds,bonds.Therefore,theprobabilityofachievingthehighestportfolioreturnwhilemaintainingthefundedstatusoftheplanwouldrequiretheuseofprivateequitiesinconjunctionwithpublicequities.Inaddition,privateequitieshaveahigh/strongpotentialtofulfilltheroleofcapitalgrowth.Fixed-incomei
19、nvestmentsareexpectedtohaveahigh/strongpotentialtofulfilltheroleofsafety.AAlimitationoftheexistingapproachusedbythecommitteetodefinetheopportunitysetisthatit:A.isdifficulttocommunicate.HAtraditionalapproachhasbeenusedtodefinetheopportunitysetbasedondifferentmacroeconomicconditions.Theprimarylimitati
20、onsoftraditionalapproachesarethattheyoverestimatetheportfoliodiversificationandobscuretheprimarydriversofrisk,cfafrmcpacmavideo,weixin:804283381ABasedonExhibit1andtheproposedassetallocation,thegreatestriskassociatedwiththeERIPis:1Withtheintroductionoftheearlyretirementincentiveplan(ERIP),thedefinedb
21、enefitpensionplanwilllikelybecalledupontomakepensionpaymentsearlierthanoriginallyscheduled.Asaresult,theneartermliquidityoftheplanisthegreatestriskarisingfromtheadditionofthealternativeassetclasses(e.g.,privateequities,hedgefunds,andrealestate).Investmentsinalternatives,suchasprivateequities,cantake
22、upwardsoffiveyearstoreachafullcommitmentandpotentiallyanotherdecadetounwind.ElA.governance.B.transparency.C.investmenthorizon.HThepensionplan,sinvestmentinprivateequitiesviaablindpoolpresentstheprospectthatlessthanperfecttransparencywillbeassociatedwiththeunderlyingholdingsofthealternativeassetmanag
23、er.Capitaliscommittedforaninvestmentinaportfolioofassetsthatarenotspecifiedinadvance.Inaddition,reportingforalternativefundsisoftenlesstransparentthaninvestorsareaccustomedtoseeingontheirstockandbondportfolios.1A.B.C.AWhichofParksstatementsregardingtheassetallocationapproachesiscorrect?OnlyStatement
24、3OnlyStatement4BothStatement3andStatement41Statement3iscorrectbecauseriskfactor-basedapproachestoassetallocationcanbeappliedtodevelopmorerobustassetallocations.Statement4iscorrectbecauseamean-varianceoptimizationtypicallyoverallocatestotheprivatealternativeassetclasses,partlybecauseofunderestimatedr
25、iskduetostalepricingandtheassumptionthatreturnsarenormallydistributed.HABasedontheforecastedenvironment,liquidityplanningshouldtakeintoaccountthatgeneralpartnersmay:A.callcapitalataslowerpace.*aBMMBMM4MMVMMWUMOMTVMflBMHParknotesthatthecurrentmacroeconomicenvironmentcouldleadtoabearmarketwithinafewye
26、ars.Liquidityplanningshouldtakeintoaccountthatunderascenarioinwhichpublicequitiesandfixed-incomeinvestmentsareexpectedtoperformpoorly,generalpartnersmayexerciseanoptiontoextendthelifeofthefund,cfafrmcpacmavideo,weixin:804283381lABasedonExhibit2andPark,sduediligence,thepensioncommitteeshouldconsideri
27、nvestingin:FundAshouldbeselectedbasedonbothquantitativeandqualitativefactors.FundAhasafive-yearIRRQ2.9%)thatisslightlylowerthan,butcomparableto,bothFundB(13.2%)andFundC(13.1%).GiventhesensitivitytothetimingofcashflowsintoandoutofafundassociatedwiththeIRRcalculation,however,thefinaldecisionshouldnotb
28、ebasedmerelyonquantitativereturns.Itisalsoimportanttomonitortheinvestmentprocessandtheinvestmentmanagementfirmitself,particularlyinalternativeinvestmentstructures.ConsideringthequalitativefactorsidentifiedbyPark,FundAistheonlyfundwithastrong,positivefactor:Itbenefitsfromserviceproviders(administrators,custodians,andauditors)withimpeccablereputations.FundBseemstobeexperiencingstyledrift,whichsuggeststhatthereturnsarenotconsistentwiththemanagersadvertisedinvestmentedge(hence,anegativefactor).FundChasexperiencedthedepartureofkeypersons,whichputsfuturefundreturnsinjeopardy(hence,anegativefactor).
