Main issues
• Shrinking surplus, therefore could international tactical asset allocation strategy enhance the fund’s performance.
• If yes, then what is the appropriate way to enter the foreign market ( physical shares, closed end foreign index funds, index options, index futures or foreign index equity swap contracts) in order to minimize the transaction costs, bid-ask spread, market impact costs, withholding taxes and index tracking error.
Fund Description
• Medium sized Canadian pension fund approx. 2 billion in assets.
• Defined benefit plan, pension paid on the basis of years of service
• Higher the fund’s long term return , lower the fund’s pension expense
• Enjoyed a surplus of 100 million in 1990
• Since then the surplus had steadily decreased to 10 million as fund has not achieved the expected long run return over past 5 years.
Asset allocation
• Initially portfolio was invested in large cap Canadian equities and high quality Canadian bonds with 4% in small cap equities and 4% in real estate for diversification.
• With Mike Schaller as president, aggressive strategic asset reallocations were made.
• Canadian bond and equity component was decreased and an investment of 3.5% in international bonds and 8.1% in international equities was made.
• Small cap equity portion of the fund was also doubled.
• However, there is still a need for aggressive international strategy to enhance profits.
• A point of concern was that international investment was restricted to 20% for retirement ...