Six Types Of Institutional Investors

1. Pension Funds

2. Endowment Funds

3. Foundations

4. Life Insurance Companies

5. Banks

6. Nonlife Insurance Companies

Items To Consider For Objectives And Constraints

1. Returns

2. Risk

3. Tax and Legal/Regulatory

4. Liquidity

5. Unique Constraints

6. Time Horizon

DC Vs DB ( Pension Funds )

DB – sponsors obligation in terms of benefits

DC – obligations in terms of contribution

DB

PBO – projected benefit obligation ( definition of plan liabilities) . S

Return- Returns need to cover pension liabilities. Discount rate of liabilities or higher .

Risk – tolerance is based on :

1. Plan funded status

2. Sponsor financial status

3. Common Risk exposure between sponsor and plan

4. Workforce characteristics

5. Plan features

Liquidity- Based on number of retirees vs current contributing members. Also plan features .

Time – going concern , age of workforce and ratio of retirees

Foundations ( grant making institutions)

Return – annual spending rate + cost of generating returns + inflation . Multiply 1 + return and minus one . Need to do this since these are ongoing concerns.

Risk – more risk tolerance than a DB . No legal liability.

Liquidity- anticipated And Unanticipated needs in excess of contributions.

Time Horizon- Long

Legal and Regulatory- can affect type of investment

Endowments – (provide funds for ongoing operations)

Return – annual spending rate + cost of generating returns + inflation . Multiply 1 + return and minus one . Need to do this since these are ongoing concerns.

Risk – depends on how much the organization is dependent on for the funds from endowment.

Liquidity- anticipated And Unanticipated needs in excess of contributions.

Time Horizon- Long

Legal and Regulatory- can affect type of investment

Insurance Company – Life Insurance

Return- determined by actuaries as rates needed to support future disbursements. Moved to segmenting Portfolios by liabilities and setting different return objective for each segment.

Risk – seen as quasi trust funds as much conservative fiduciary principals limit risk tolerance . Use asset/liability management techniques . Other type of risks affecting are reinvestment risk , credit risk , valuation concerns and cash flow volatility.

Liquidity- asset liability mismatch and asset marketability.

Time Horizon- long term investors. Some segments can be short term .

Regulations – is large for life insurers . With regard to type of investments, prudent investor rule and valuation methods.

Insurance Company- Non Life

Everything for life insurance companies above applies in addition they tend to have shorter term liabilities, and have a more frequent need to liquidate investments to supplement cash flow ( large events ) .

Bank – ( the money left after loan demands have been met are invested for profit by a bank )

Overall objective is to manage interest rate risk , manage liquidity, produce income and manage credit risk .

Return – earn positive spread over cost of funds

Risk – below average

Liquidity- key concern

Legal and regulatory- high

ALM – key concern for DB , Insurance Companies and Banks