Optimal portfolio selection, Financial Management

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Optimal Portfolio Selection:

The next step involves selecting the optimal portfolio. The strategic asset allocation will have overriding importance in pension fund management. Asset classes will be selected on the basis of their match with liabilities in terms of correlation and volatility, rather than on the basis of expected return. Every pension scheme will have a scheme-specific funding standard that reflects the maturity structure of the liabilities of the scheme. The optimal portfolio selection consists of various techniques of modeling the efficient frontier; selecting the optimal portfolio based on the expected risk and return is one of the best possible methods.

Risk Sensitivity Analysis

Once the portfolio has been selected and implemented, a risk sensitivity analysis of the same under different possible parameters must be made; and accordingly, the asset-liability management techniques have to be decided upon and implemented.

Review of the Investment Policy

Following the risk sensitivity analysis of the portfolio, the investment policy must be reviewed to decide whether it complies with the fund's mission, risk tolerance factors, investment objectives, policy asset mix, investment manager structure and also whether it complies with the standards set in the performance evaluation.

Optimization of the Manager Structure

This involves deciding the type of manager required to head the fund, whether active or passive, balanced or specialist, etc. Different funds have different investment objectives and as such the same type of manager may not suit all the pension fund structures. Once the decision is made, the selection process of the manager must be initiated.

Performance Monitoring and Evaluation

The final step is monitoring the performance, both quantitatively and qualitatively. This includes attribution and style analysis, compliance with the policies; and it is not limited to the fund itself, but also involves monitoring the status of the capital markets and the status of satisfaction of the investors. Risk Adjusted Net Value Added (RANVA), EVA, and VAR are some important tools to measure the performance of the pension fund.

 


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