Portfolio Management Overview

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Questions and Answers

Which sovereign wealth fund has the largest assets as of August 2018?

Norway Government Pension Fund—Global (correct)

Abu Dhabi Investment Authority

China Investment Corporation

Kuwait Investment Authority

Which sovereign wealth fund was established most recently?

Public Investment Fund (correct)

Abu Dhabi Investment Authority

China Investment Corporation

Government of Singapore Investment Authority

Which country has a sovereign wealth fund that was established in 1953?

Singapore

Saudi Arabia (correct)

Kuwait (correct)

UAE

What is the total amount of sovereign wealth fund assets under management as of August 2018?

$8,109 billion Signup and view all the answers

What year was the Temasek Holdings sovereign wealth fund established?

1976 Signup and view all the answers

What is a common reason for plan sponsors to favor DC plans over DB plans?

DC plans typically have lower costs and risks to the company. Signup and view all the answers

Which countries represent the three largest pension markets in the world?

United States, United Kingdom, and Japan. Signup and view all the answers

By the end of 2017, what was the total amount of global pension assets?

US$41 trillion. Signup and view all the answers

What trend has been observed regarding the market share of DB plans?

DB plans are losing market share of pension assets to DC plans. Signup and view all the answers

What percentage of global pension assets do the United States, United Kingdom, and Japan comprise?

Over 76%. Signup and view all the answers

Which country had the highest total pension assets by the end of 2017?

United States. Signup and view all the answers

Which of the following is NOT a characteristic of DB plans compared to DC plans?

DB plans generally have lower administration costs. Signup and view all the answers

What is a common reason some insurance companies are outsourcing portfolio management responsibilities?

To gain access to sophisticated alternative asset classes Signup and view all the answers

How do sovereign wealth funds (SWFs) differ from typical investment funds?

SWFs are state-owned and do not manage specific liabilities Signup and view all the answers

What characteristic is common in the investment strategies of life insurers compared to property and casualty (P&C) insurers?

Life insurers tend to invest in longer-term assets Signup and view all the answers

What trend was observed in the assets of sovereign wealth funds from 2007 to March 2018?

Assets increased to over US$7.6 trillion Signup and view all the answers

Which of the following statements about the largest sovereign wealth funds is correct?

They tend to concentrate in Asia and resource-rich areas Signup and view all the answers

What primary objectives do sovereign wealth funds pursue with their investments?

Achieving government budget stabilization or future development Signup and view all the answers

Why are some insurers offering separately branded subsidiaries to manage investments for third-party clients?

To expand their business model beyond insurance Signup and view all the answers

Which type of asset do life insurers primarily focus on in their investment strategies?

30-year government and corporate bonds Signup and view all the answers

What distinguishes sovereign wealth funds from pension funds?

SWFs typically do not have specific liability obligations Signup and view all the answers

What is a key reason why some insurance companies manage investments for third parties?

To generate additional revenue streams Signup and view all the answers

What is the primary objective of spending rules for an endowment institution?

Balancing support for current operations with preserving purchasing power Signup and view all the answers

What is the current target spending rate approved by the Yale Corporation?

5.25% Signup and view all the answers

How does the smoothing rule influence endowment spending?

Gradually modifies spending based on previous years' expenditures and market changes Signup and view all the answers

What percentage of the previous year's spending is used in Yale's smoothing rule?

80% Signup and view all the answers

Which of the following best describes the trade-off managed by the spending policy?

Between stable income flow and real value preservation of Endowment Signup and view all the answers

What happens to spending in a year with a significant increase in Endowment market value?

Spending adjusts gradually according to the smoothing rule Signup and view all the answers

What is the role of spending policies in the context of budget balance?

To define a compromise that makes budget balance meaningful Signup and view all the answers

What is NOT a constraint typically considered in investment approaches for institutions?

Accruing high immediate returns regardless of risk Signup and view all the answers

Which statement reflects the dual goals of an endowment's spending rule?

To offer considerable operational support while preserving asset value Signup and view all the answers

What is the main investment objective of the Wellcome Trust?

Ensure 4.5% real return over the long term Signup and view all the answers

How do banks primarily invest their excess reserves?

In conservative and short-duration fixed-income investments Signup and view all the answers

What type of investments do insurance companies typically make with their general account?

Conservative fixed-income securities Signup and view all the answers

Which account typically targets a higher return within an insurance company?

Surplus account Signup and view all the answers

What distinguishes life insurers from property and casualty insurers?

The duration of their liabilities and liquidity considerations Signup and view all the answers

What is a paramount concern for banks when investing excess reserves?

Meeting depositor withdrawal requests Signup and view all the answers

Which asset classes may an insurer's surplus account invest in?

Public and private equities, real estate, hedge funds Signup and view all the answers

What do banks often use their asset management divisions for?

Providing retail and institutional investment products Signup and view all the answers

How is the general account of an insurance company primarily structured?

Invested conservatively in fixed-income securities Signup and view all the answers

Which statement accurately reflects the investment strategy of the Wellcome Trust?

It aligns asset allocation with future funding needs. Signup and view all the answers

Study Notes

Portfolio Management: An Overview

Global wealth management firms target high-net-worth investors, often needing customized investment and estate planning services.
Institutional investors include defined benefit pension plans, endowments, foundations, banks, insurance companies, investment companies and sovereign wealth funds. Each has unique investment goals, asset allocation preferences and strategies.
Defined benefit pension plans (DB plans) are company-sponsored plans offering employees a predefined retirement benefit. The plan sponsor is responsible for the contributions and associated funding risk. The plans are committed to paying pensions to members. The goal is to match fund assets with liabilities.
Defined contribution plans (DC) are becoming more popular than DB plans, with lower costs and risk to the company.
Global pension assets totaled over US$41 trillion by the end of 2017. The US, UK, and Japan are the largest pension markets, comprising over 76% of global assets.

Global Pension Assets (2017)

Country/Region | Total Assets (US$ billions)
United States | 25,411
United Kingdom | 3,111
Japan | 3,054
Australia | 1,924
Canada | 1,769
Netherlands | 1,598
Switzerland | 906
South Korea | 725
Germany | 472
Brazil | 269
South Africa | 258

Endowment and Foundations

Endowments are funds of non-profit institutions for providing services. Foundations are grant-making entities.
US is the primary market, holding an estimated US$1.6 trillion in combined assets.
Their long-term nature often leads to significant alternative investments.
Yale University has developed endowment-specific asset allocation models.

Investment Objectives and Spending Rules

Endowments and foundations strive to maintain real (inflation-adjusted) capital value while generating income.
Yale University endowment utilizes a target spending rate of 5.25% and a smoothing rule for annual spending.

Types of Investors

Banks are financial intermediaries accepting deposits and lending money. They often invest excess reserves in short-term fixed income to earn a return above deposit obligations.
Insurance Companies receive premiums for insurance policies and need to manage investments to meet future claims payout obligations. They have general account portfolios invested conservatively in a mix of fixed income, and surplus account assets invested more aggressively, such as stocks and bonds.
Sovereign Wealth Funds (SWFs) are state-owned funds that invest in financial markets for various purposes, typically associated with government development or economic stabilization. They have substantial assets (over US$7.6 trillion in 2018) and invest in diverse asset classes, often concentrated in Asia.
Investments needs vary depending on the type of investor and their objectives, with regards to time horizon, risk tolerance and income needs.

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Description

Explore the essential aspects of portfolio management, focusing on global wealth management firms and their services for high-net-worth investors. Understand the differences between defined benefit and defined contribution plans, along with the roles of institutional investors. This quiz highlights market trends and the significance of pension assets.