Considering the below pension fund investment strategy consider the following:

 

The asset allocation policy for the defined benefit fund is silent on the use of active asset allocation
(AAA), which is an approach whereby the fund would vary asset allocation, rather than maintain a
fixed or strategic asset allocation (SAA).
Discuss the benefits and disadvantages of the AAA approach in general and explain the difference
between active asset allocation and active management. 

 

Transcribed Image Text:

Objectives of the defined benefit fund As the fund represents a broad array of aging members with no new members being permitted, the most appropriate objective for the fund is to ensure capital is maintained over the medium term. Asset allocation policy The strategic asset allocation is set in the following way: • As the average age of fund members is above 40 a conservative asset allocation is adopted. • Strategic asset allocations are set each year using the average asset allocation of peer group funds (sourced through word of mouth). • The fund uses tight asset allocation tolerance bands and rebalances whenever the ranges are breached. Australian equities International equities Australian fixed interest International fixed interest Property - Australian - listed and direct Cash Minimum 5 5 45 15 10 10 Choosing managers In choosing fund managers we use the following guidelines: • A-rated from our current global investment consultant • outperformance over the relevant benchmark over the past five years • a style that is complementary to our existing portfolio • equity portfolios that have a 'value' style bias. Maximum 10 10 50 20 15 15 Objectives of the defined benefit fund As the fund represents a broad array of aging members with no new members being permitted, the most appropriate objective for the fund is to ensure capital is maintained over the medium term. Asset allocation policy The strategic asset allocation is set in the following way: • As the average age of fund members is above 40 a conservative asset allocation is adopted. • Strategic asset allocations are set each year using the average asset allocation of peer group funds (sourced through word of mouth). • The fund uses tight asset allocation tolerance bands and rebalances whenever the ranges are breached. Australian equities International equities Australian fixed interest International fixed interest Property - Australian - listed and direct Cash Minimum 5 5 45 15 10 10 Choosing managers In choosing fund managers we use the following guidelines: • A-rated from our current global investment consultant • outperformance over the relevant benchmark over the past five years • a style that is complementary to our existing portfolio • equity portfolios that have a 'value' style bias. Maximum 10 10 50 20 15 15

Answer rating: 100% (QA)

Active asset allocation AAA involves adjusting the asset allocation of a portfolio over time in response to changing market conditions or other factor... View the full answer