The Tactical and Strategic Asset Allocation of Pension Funds Essay

The Tactical and Strategic Asset Allocation of Pension Funds - Essay Example The process of asset allocation may take place afresh for a new investor or through a review for an existing investor. The review of the pattern of allocation may take place on a continuous basis or periodically. The most important is the determination of the assets, liabilities and assess the net worth of investor that is available for investment. If the goal of the investor is to maximize the assets, the goal should be determined in terms of the assets required to be accumulated by the end of the investment period. This report seeks to brief asset allocation procedure and the strategies and tactics to be taken care of by an investor of pension fund to maintain a balance between risk and return. The origin of the employee benefit funds can be traced to the late 1800s; but it is their tremendous growth in the last 25 years that has established them as one of the most influential institutional investors in the United States of America. Pension funds dominate the investment scenario in the United States, United Kingdom, Japan and Canada. Almost 90 percent f the pension funds in Japan, the UK and Canada are mid-sized and large private and public sector employee funds. The asset allocation structure for pension funds can differ for both a country and a type of plan. The return from any investment is a function of the ability to take risk and the realization of market expectations. The economic model of defined pension plan is useful in interpreting the questions regarding investment decisions for pension assets. If defined benefit plans are looked at as an act of pension debt-servicing financial institutions, pension asset should be managed in the context of the nature of pension plan balance sheets. The riskiness of the pension fund cannot be judged by comparing with other pension plans or in terms of the absolute values of the pension liabilities, but are based on the nature of the plan liabilities, and in the context of the cash flow and the balance sheet characteristics of the employer liable to pension claims. The objectives set here for the fund is long term return and capital appreciation at the end of maturity. This needs to be done carefully by fund managers and the fund should be allocated in such a manner that majority of the fund sh ould be invested in equity of blue chips so that regular return can be expected and capital appreciation is also possible. However, there may be uncertainties with regard to the return from equity and to protect the investor from such a risk, a sizeable portion should be kept in bonds. The following two approaches will clearly discuss the manner in which the fund is allocated to