1

11/25/15

Bilal

Wahid
Qurat-ul-Ain
M.Raza
111112
120131
120136

11/25/15

GROUP # 2

11/25/15

MANAGING INSTITUTIONAL
INVESTOR PORTFOLIOS

PORTFOLIO MANAGEMENT PROCESS

PLANNING
Capital Market Expectations
E(r)/

PLANNING
Investor Objective & Constraint
11/25/15

PLANNING
Strategic Asset Allocation
Efficient Frontier
Based on objective/constraints, max return on risk adjusted basis
EXECUTION
Tactical Asset Allocation
Security Analysis
Transaction Costs
FEEDBACK
Performance/Monitoring
Performance measures Sp
Attribution analysis
REBALANCE

5
Types of Institutional Investors:

Pension Funds

2.

Foundations & Endowments

3.

Insurance Industry

4.

Banks & Other Institutional Investors

11/25/15

1.

CONTD..

similar to individuals except that

IPS must consider liabilities that have been entered
into

Asset/Liability Management (ALM)

managing investment of assets to control relative
asset/liability values

11/25/15

IPS for institutions is

PENSION FUNDS

General Definitions:

Plan Sponsor organization (corporation, non

profit entity, government) that provides some or
all of funds pension plan
Plan Participants receive promise related to
retirement

11/25/15

Pension Plan
portfolio of assets that supports PROMISE to
plan participants
promises MIGHT represent liability of plan
sponsor

8
PENSION FUNDS
11/25/15

Types of Pension Plans

Defined-benefit (DB) plan agreement that Plan

Sponsor promises specific BENEFIT to Plan
Participants based on formula (related to years of
service & rate of pay)
PROMISE generates future financial obligation or
liability
If individual account is maintained for each
individual Plan Participant is defined Cash Balance
Plan

CONTD..
Defined-contribution (DC) plan agreement
that Plan Sponsors make CONTRIBUTION to
Pension Plan. Liability to Plan Sponsor is limited
to their contribution

Types
Pension Plans
Profit Sharing Plans which are tax advantaged
Sponsor directed (profit sharing plan) sponsor
selects investments
Participant directed Employee allocated retirement
among available investment funds

11/25/15

10

11/25/15

QURAT-UL-AIN

11
Type
Plan
DB

DB VS DC

Employer
Pension Benefits are
liability for employer
Benefits are determine by
criteria such as years of
service & salary

DC

Plan Sponsor are

responsible for managing
plan assets to meet
pension obligations
Company promises to
keep contributions current
Only financial liability is
making contributions
Plan MUST offer
employees sufficient
number of investment
vehicles for suitable
portfolio construction

Employee
Received periodic payments
at retirement based on
formula
Subject to early termination
risk if employee is
terminated prior to
retirement
Does NOT bear
risk/return consequences
of portfolio
performance
Owns
plan assets
& can
transfer account to other
qualified plans
Must make ALL investment
decisions given available
investment vehicles
Bears ALL investment risk

12
DEFINED-BENEFIT (DB) PLAN

11/25/15

Pension assets MUST FUND payment of LIABITIES

related to pension benefits (ALM)
Pension Plans investment performance should be
judged
on absolute basis but also
adequacy of its assets with respect to liabilities

13

Funding Status relationship between

value of plans assets & present value of its
liabilities

Pension
Surplus

Market value
Pension Assets

Present value
Pension Plan Liabilities

Fully Funded Pension surplus > 0

Underfunded plan Pension surplus < 0

11/25/15

14

DEFINED-BENEFIT (DB) PLAN

11/25/15

Definitions of Pension Plan Liabilities

Accumulated Benefit Obligation (ABO)
Present value of pension benefits
(liabilities) assumes
plan is terminated immediately &
provides benefits based on their
service to date
excludes impact of future salary
increases

15

employee will continue to work &

projects future compensation increases

11/25/15

Projected Benefit Obligation (PBO)

Present value of pension benefits (liabilities)
assumes

Total Future Liability used for return objective

Present value of pension benefits (liabilities) that
includes not only future compensation increases
but also includes

Changes in benefits associated with inflation

Changes in workforce

16

DB RISK OBJECTIVES
11/25/15

Risk Objective willingness & ability to bear risk

Factors impacting Risk Objective
Plan Surplus (cushion) ability to tolerate risk
Plan Deficit willingness to tolerate risk but
ability to tolerate risk

Sponsors financial status

debt/total assets ability to tolerate risk
Current & expected profitability ability to
tolerate risk
correlation of sponsor operating results (net
income) with pension asset returns ability to
tolerate risk

17
Plan features
if NO provision for early retirement ability
to tolerate risk
if NO provision for lump-sum distribution
ability to tolerate risk

Work force characteristics

younger age of workforce ability to
tolerate risk
ratio of active lives to retired lives
ability to tolerate risk

This is task performed by actuary support info in

f/s

11/25/15

18

DB RISK OBJECTIVES
11/25/15

Consider DB plan / Plan Sponsor with following

characteristics
Plan assets are 108% of present value of
pension obligations (liabilities) ability
to tolerate risk
Balance sheet of Plan Sponsor is very
strong: debt/total assets ability to
tolerate risk

19

Earnings of Plan sponsor are very strong

despite operating in cyclical industry:
correlation of sponsor operating results
with pension asset returns ability to
tolerate risk

Age of workforce is very low ability

to tolerate risk

QUESTION: What is ability of DB plan to

tolerate risk?
ANSWER: Ability to tolerate risk is above
average

11/25/15

20

DB RETURN OBJECTIVES

11/25/15

Possible Return Objectives for DB

Return objective is to achieve returns that funds its
pension liabilities (on inflation adjusted-basis) Return
pension assets discount rate used to calculate
present value of liabilities (PBO)
Return Objectives based on contributions
Stretch Target make future pensions
contributions = 0
Realistic Objective minimize amount of
future pension contributions (expressed on
undiscounted or discounted basis)
Return Objectives based on pension income
Minimize pension expense (return on pension
assets reduces pension expenses) reflected on
income statement

21

DB CONSTRAINTS

Factors impacting on DB Constraints

Liquidity Requirement (benefit payments pension contributions)
number of retired lives liquidity requirement
plan sponsors contribution relative to benefit disbursements
liquidity requirement
Plan features such as early retirement liquidity requirement
Time Horizon
Plan is going concern (on going) vs plan termination is expected
(shorter)
Younger workforce & larger proportion of active lives time
Tax horizon
DB Plan are tax exempt thus decisions can be made without
considering tax
Legal & Regulatory
DB Plan must adhere to laws & regulations
Unique Circumstances
Laws & regulations may required plan sponsors to exercise due
diligence
Plan sponsors may have imposed social responsibility constraints
on types of securities that can be held

11/25/15

22
DEFINED-CONTRIBUTION (DC) PLAN
Types of DC Plans
Participant directed
Plan Sponsor directed

Principal Investment Issues

Diversification Plan sponsor MUST offer menu
investment vehicles to construct suitable
portfolios
At least three (3) investment choices
Provision to move between investment choices
Company Stock investment in plan sponsors
stock should be limited
DC Investment policy enable number of different
individual investor objectives & constraints

23

11/25/15

M.RAZA SIDDIQUI

24

HYBRID & OTHER PLANS

Hybrid Plans combine features of DB & DC plans

11/25/15

DB plans
Cash balance plan provides personalized
statement includes
Annual contribution credit % of pay based
on age
Earnings credit % increase tied to LT interest
rate
DC Plans
Employee stock ownership plans (ESOP)
encourage employees to become stockholder of
their employers which may be either before or
after tax plans

25

11/25/15

IPS FOR AIR UNIVERSITY

DEFINED CONTRIBUTION
PLAN

26

INTRODUCTION OF EMPLOYEE
BENEFITS
11/25/15

After 1 year of employment Institution offers:

Medical

insurance
Contribution Provident Fund
Pension Fund

27

POLICY

CPF is not offered to Class IV employees,

currently 49 people are employed by the Org. out
of them 17 are in Class IV.
For CPF funds are invested in

Qoumi

bachat scheme.
Defense saving certificate.
National saving certificate.

11/25/15

Duration
If an employee leaves organization before 3 years,
He /She has to return previous full amounts
contributed by Org. as well as interest amount.

28

PENSION FUND
Funds are managed by Insured by 3rd
Party EFU,
Institution is following Defined contribution
plan, Before investing participant is asked
either they want to invest in interest based
system or in Shriah based system

AU contribute annually 500-10% of Basic Salary as

insurance premium depending on respective scale.

11/25/15

Pension

29

11/25/15

30

11/25/15