Description: Presents results of 2003-2012 cohorts of insurance company private placement bonds. Finds private bonds show a 15bp annual advantage relative to public bonds, due to lower loss severity.

Description: The author, head of Alternatives Investment Specialists at Fortis Investments, recently presented a research paper on the potential benefits and possible pitfalls of investing in illiquid assets. This newsletter provides a brief summary of that paper. The full paper is available upon request.

Description: Chairperson’s column discussing the state of the world today and how that influences investment strategies and describes to seminars the section sponsored to keep members apprised of changes.

Description: Is Risk/Return a sound tool for decision-making? No. It is not consistent, not objective, distorts decision and degrades governance. Why? What shall we do then?

Description: This paper is concerned with the evaluation of the common portfolio management strategy which consists of delegating to different managers portions of the assets to be invested. This practice is shown to be close to optimal under the realistic assumption that the private signals of the financial experts are positively correlated. This is accomplished by comparing this multi-manager approach to an optimal investment policy derived under full information, within the context of a standard normal returns/exponential utility market timing model.

Description: The Society of Actuaries’ Pension Section Research Committee commissioned this study to help actuaries develop forward thinking long-term estimates of future equity risk premiums. Equity risk premium is the amount by which the total return of a stock market index, such as the S&P 500, exceeds that of government bonds. Equity risk premiums, calculated from historical data, have been used to project long term values of equity portfolios in retirement plans. The validity of using historical data to project future equity returns will be examined along with other forward looking methods.

Description: Feature article discussing the PBGC’s asset reallocation plan.

Description: This is a Fellowship Credit Research Paper. A portfolio of different insurance policies such as temporary, endowment and whole-life insurance policies is studied in a stochastic mortality and interest environment. The first two moments of the present value of the benefits of the portfolio are derived. The riskiness of the portfolio as measured by the variance of the present value of the benefits can be divided into an insurance risk and an investment risk in two different ways. One way leads to a more natural interpretation of the two risk components. A simple portfolio is used to illustrate the results.

Description: Reviews anecdotal evidence that the current shift to passive investing is an indication that investors are irrationally ignoring market risk.

Description: The impact of Fed’s QE program on the financial markets has been enormous and profound. The tapering and the eventual removal of the stimulus will be equally enormous and profound, and may be disruptive. To adapt to the potential regime change in near future, some investment strategies have been proposed: (1) shorten duration to focus on the short end of the yield curve and create laddered portfolios; (2) reduce allocation to high yield bonds; (3) rotate out interest rate sensitive sectors such as utilities; and (4) use interest rate derivatives to hedge the interest rate uncertainties lying ahead. On the other hand, contrarians who see the QE program continuing may stay the course and consider (1) adding duration, (2) gaining exposure to high yield bonds, and (3) increasing allocation to utilities and telecoms.