CFA 2018 level 3 schweser practice exam CFA 2018 level 3 question bank CFA 2018 CFA 2018 r13 managing institutional investor portfolios IFT notes

Managing Institutional Investor Portfolios IFT Notes Managing Institutional Investor Portfolios Introduction Pension Funds 2.1 Defined-Benefit Plans: Background and Investment Setting 2.2 Defined-Contribution Plans: Background and Investment Setting 2.3 Hybrid and Other Plans Foundations and Endowments 10 3.1 Foundations: Background and Investment Setting 10 3.2 Endowments: Background and Investment Setting 13 The Insurance Industry 14 4.1 Life Insurance Companies: Background and Investment Setting 15 4.2 Non-Life Insurance Companies: Background and Investment Setting 17 Banks and Other Financial Institutions 19 5.1 Banks: Background and Investment Setting 19 5.2 Other Institutional Investors 20 Comparison of Institutional Investors 21 Summary 23 Examples from the Curriculum 30 Example Apex Sports Equipment Corporation (1) 30 Example Apex Sports Equipment Corporation (2) 30 Example Apex Sports Equipment Corporation (3) 31 Example Apex Sports Equipment Corporation (4) 32 Example Apex Sports Equipment Corporation (5) 32 Example Taxation and Return Objectives 32 Example Apex Sports Equipment Corporation Defined-Benefit Plan Investment Policy Statement 33 Example Participant Wanting to Make Up for Lost Time 35 Example Participant Early in Career 36 Example 10 Investment Policy Statement for BMSR Company Defined-Contribution Plan 36 Example 11 BMSR Committee Decision 39 Example 12 The Fund for Electoral Integrity 39 Example 13 The City Arts School 40 Example 14 Investment Policy Statement for a Stock Life Insurer 43 IFT Notes for the Level III Exam www.ift.world Page Managing Institutional Investor Portfolios IFT Notes Example 15 Investment Policy Statement for a Casualty Insurance Company 46 Example 16 Investment Policy Statement for a Commercial Bank 48 This document should be read in conjunction with the corresponding reading in the 2018 Level III CFA® Program curriculum Some of the graphs, charts, tables, examples, and figures are copyright 2017, CFA Institute Reproduced and republished with permission from CFA Institute All rights reserved Required disclaimer: CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by IFT CFA Institute, CFA®, and Chartered Financial Analyst® are trademarks owned by CFA Institute IFT Notes for the Level III Exam www.ift.world Page Managing Institutional Investor Portfolios IFT Notes Introduction In this reading we will look at the portfolio management process for five different types of institutional investors:  Pension funds  Foundations  Endowments  Insurance companies and  Banks Pension Funds This section addresses LO.a: LO.a: Contrast a defined-benefit plan to a defined-contribution plan and discuss the advantages and disadvantages of each from the perspectives of the employee and the employer Pension funds are large pools of assets created by a plan sponsor for the purpose of providing retirement income for beneficiaries For example, many employers offer pension benefits or health benefits to its employees In a defined-benefit (DB) pension plan, employees are promised specific retirement benefits, which the plan sponsor is typically legally-obligated to provide The sponsor makes contributions to a plan and bears all investment risk Trustees are appointed with a mandate to ensure that pension assets are managed in the interests of the plan’s beneficiaries In a defined-contribution (DC) pension plan, the sponsor’s obligations is limited to only making periodic contributions Beneficiaries bear all investment risk Hybrid plans, which have some feature of DB pensions and some features of DC pensions, are discussed in Section 2.3 The advantages and disadvantages of DB and DC pension plans from the perspective of the plan sponsor are summarized below: Defined Benefit  Advantages   Defined Contribution Income from operations can be supplemented by income generated from pension plan investments Pension plan assets can be used to support company stock price    No liability beyond making contributions No investment risk No need to administer a plan or comply with laws and regulations governing DB pensions 100% of investment risk  Employer must comply with laws governing DC pensions, such as providing a range of investment options and an IPS Disadvantages IFT Notes for the Level III Exam www.ift.world Page Managing Institutional Investor Portfolios IFT Notes The advantages and disadvantages of DB and DC pension plans from the perspective of plan beneficiaries are summarized below: Defined Benefit Defined Contribution    No investment risk Income during retirement Advantages      Disadvantages   Risk of losing job before becoming eligible for benefits Vesting period are common Restricted withdrawal of funds High concentration of risk (both job and pension with employer)    Own all personal contributions and sponsor contributions (after vesting period) Assets are easily transferable Portfolio to suit individual needs Taxable income is reduced 100% of investment risk Must monitor and make necessary reallocation decisions Restricted withdrawal of funds 2.1 Defined-Benefit Plans: Background and Investment Setting DB pension plan assets represent deferred compensation Over the course of their working lives, beneficiaries accumulate benefits that will be paid out after retirement The sum of all payments due to beneficiaries is the pension plan’s liability The curriculum offers three definitions for pension plan liabilities:  Accumulated benefit obligation (ABO) is the value of all benefits that have been earned as of today This figure is relatively easy to calculate, but it excludes the value of any obligations that will be accumulated in the future  Projected benefit obligation (PBO) includes all the benefits in the ABO and adds the present value of benefits that are expected to be earned in the future  Total future liability (TFL) includes all the benefits in the PBO, but makes a more comprehensive estimate of future benefits that will be accumulated TFL may be used internally when setting risk and return objectives, but PBO is the most reasonable liability measure to use for estimating a plan’s funded status, which is the ratio of the market value of a plan’s assets (AMV) to the present value of its liabilities (PBO)  If AMV = PBO, the plan is fully-funded and the funded status is 100%  If AMV > PBO, the plan is in surplus and the funded status is >100%  If AMV < PBO, the plan is in deficit (or underfunded) and the funded status is