Minco Ltd, a large mining company, provides a superannuation fund for its employees. The fund's manager says: 'We know the mining industry well, so we feel comfortable investing most of the fund in a portfolio of mining company shares'. Advise Minco's employees on whether to endorse the fund's investment policy.

My advice to Minco's employees would be not to endorse the fund's investment policy. The superannuation funds are the same benefits that retirees receive during their retirement period. By that time, the investors would want to have a portfolio that gives a stable return; the risk appetite for this category of investors is minimal or even nil. They do not want any risk even if returns are lower. Any investment policies must address the risk appetite of target investors and optimization of risk. The optimization risk should occur in sync with risk appetite though diversification and appropriate choice of fund.

The superannuation fund should be invested in a portfolio which either risk-free or has minimal risks. This type of portfolio should have majority of funds into different fund assets like treasury bills, government bonds, and bonds of corporates with credit ratings of AAA and many others, which are risk-free or have minimal risks. The portfolio should be well-diversified and cannot have the majority of its funds into one asset that shares of the mining company (even if it's a known company). In most cases, not all shares, industries and regions have prospered equally or to the same degree; therefore, spreading the assets across different parts of the stock market, it can help reduce portfolio risk (Fidelity Viewpoints, 2019).

The investment policy of such a fund should have a minimal risk with required target returns. Even if it tries to invest in asset category 'shares,' the shares should be blue-chip companies that have consistent and stable returns. The selection of securities should be independent of biases (like investing in its own company). The policy should be objective and cater to the specific requirement of target investors rather than choosing a company just because the investors are working in it. Setting and maintaining the strategic asset allocation are among the most critical ingredients in long-term investment success. (Fidelity Viewpoints, 2019).

References:

Guide to diversification. (2019, July 30). Retrieved from https://www.fidelity.com/viewpoints/investing-ideas/guide-to-diversification

Hagin, R. L. (2004).Investment Management: Portfolio Diversification, Risk, and Timing--Fact an. John Wiley & Sons.

Hagin, R., & DeRose, K. (2014).Winning investment strategies: blueprints for successful investment management. Hoboken: John Wiley & Sons.