THE NEEDS AND RESOURCES OF INVESTORS

THE NEEDS AND RESOURCES OF INVESTORS

THE NEEDS AND RESOURCES OF INVESTORS

THE NEEDS AND RESOURCES OF INVESTORS

Many trustees and investment counsellors make only rudimentaryefforts to analyze the needs, resources, and tastes of their clients,whether they be individuals, corporate trustors of pension funds, endowed institutions, or others. In view of the importance of investmentpolicy, the lack of any systematic, sophisticated analysis of the relevantcircumstances of the investor is unfortunate.

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For example, actuaries for large corporations typically provide estimates of the characteristics of the firm's employees for only a yearor two into the future, although longer-term estimates are sometimesprovided. Such data can be the raw material for estimating the liabilities of the corporate pension fund. Of course, there is uncertaintyregarding the size of the work force, its composition by age and jobclassification, its retirement benefits, and so forth, but actuaries can andshould provide probability distributions of these variables and a summary probability distribution of the fund's liabilities.

When such information is combined with distributions of rates ofreturn resulting from different investment strategies, it becomes possible to simulate the operation of the fund, indicating the likely rangeof requirements for corporate contributions year by year and otherthings of interest to the trustor. On the basis of such simulations, thetrustor and trustee have the raw material for a rational choice ofinvestment policy.

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The declining firm with a relatively old work force almost certainlyshould choose a different policy from the rapidly growing firm witha relatively young work force. The former has great need for liquidity and a relatively short horizon, indicating the desirability of a portfolioof relatively low risk. The latter company has virtually no possibilityof needing liquidity in the near term, is therefore relatively immuneto the impact of near-term fluctuations in the value of its pensionfund, and can (should?) bear relatively high risk with the associatedrelatively high expected return. Management science is beginning toenable actuaries to play a more useful role in helping trustees andtrustors choose an investment policy more rationally.

Similar techniques can be applied to other classes of investors. Universities, for example, have to choose expenditure policies as well asinvestment policies. Simulation permits trustees to see the probableeffects of different combinations of such policies on annual expenditures from endowments and annual changes in their market value.

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