Institutional IPS's - Summarized

Community, assets, interest, foundation, infinite

Foundation IPS

Return: Depends on time horizon stated for the foundation.

Risk tolerance: Moderate to high, depending on spending rate and time horizon. Usually more aggressive than pension funds.

Liquidity: 5% of assets for Independent and Company sponsored foundations, 85% of dividend and interest income for Operating foundations and may be subject to spending 3.33% of assets. No spending requirement for Community foundations.

Time horizon: Usually infinite.

Tax considerations: Not taxable with the exception on investment income from private foundations in the U.S.(1%).

Legal/Regulatory: Few. Many states in the U.S. have adopted the Uniform Management Institutional Funds Act as the regulatory framework. Prudent investor rule generally applies.

Endowment IPS

Return: Usually funded for the purpose of permanently funding an activity. Preserve asset base and use income generated for budget needs. No specific spending requirement. Balance the need for high current income with long-term protection of principal. Ensure purchasing power is not eroded by inflation. May use total approach or may strive to minimize spending level volatility.

Risk tolerance: Linked to relative importance of the fund in the sponsor's overall budget picture. Inversely related to dependence on current income. Exposure to market fluctuation is a major concern. Infinite life means that overall risk tolerance is generally high.

Liquidity: Usually low. High if large outlays (i.e., capital improvements) are expected.

Time horizon: Usually infinite.

Tax considerations: Income is tax-exempt.

Legal/Regulatory: Few. Many states in the U.S. have adopted the Uniform Management Institutional Funds Act as the regulatory framework. Prudent investor rule generally applies.

Unique needs: Diverse and endowment specific.

Life Insurance Company IPS

Return: Three components: 1) minimum required rate of return – statutory rate set by actuarial assumptions; 2) enhanced margin rates of return or "spread management"; 3)surplus rates of return, where surplus equals total assets – total liabilities.

Risk tolerance: Specific factors include: market volatility adversely impacts asset valuation, a low tolerance of any loss of income or delays in collecting income, reinvestment risk is a major concern, and credit quality is associated with timely payment of income and principal.

Liquidity: Need to address three primary concerns: disintermediation, asset-liability mismatches, and asset marketability risk.

Time horizon: Traditionally 20-40 years, but progressively shorter as the duration of liabilities have decreased due to increased interest rate volatility and competitive market factors.

Tax considerations: Taxes are a major consideration. Two parts for tax purposes: policyholder's share is not taxed; funds transferred to the surplus are taxed.

Legal/Regulatory: Heavily regulated at the state level. Regulations relate to eligible investments, prudent person rule, and valuation methods.

Unique needs: Diversity of product offerings, company size, and level of asset surplus.

Nonlife Insurance Company IPS

Return: Greater uncertainty regarding claims, but not as interest rate sensitive. Fixed income component should maximize the return for meeting claims. Equity segment should grow the surplus/supplement funds for liability claims. Impacted by: competitive pricing policy, profitability, growth of surplus, after-tax returns, and total return.

Risk tolerance: Risk must be tempered by the liquidity requirements. Inflation risk is a big concern because of replacement cost policies. Cash flow characteristics are unpredictable. Many companies have self-imposed ceilings on the common stock to surplus ratio.

Liquidity: Relatively high.

Time horizon: Short, due to nature of claims.

Tax considerations: Taxes play an important role; frequent contact with tax counsel is advised.

Legal/Regulatory: Considerable leeway in choosing investments. Regulations less onerous than for life-insurance companies.

Unique needs: The financial status of the firm and the management of the investment risk and liquidity requirements influence the IPS.

Bank IPS

Return: The return objective for the bank's securities portfolio is primarily to generate a positive interest rate spread.

Risk: The most important concern is meeting liabilities, and the bank cannot let losses in the securities portfolio interfere with that. Therefore, its tolerance for risk is below average.
Time horizon: Bank liabilities are usually fairly short term, so securities in the portfolio should be of short to intermediate maturity/duration.

Liquidity: Since banks require regular liquidity to meet liabilities and new loan requests, the securities must be liquid.

Tax: Banks are taxable entities.
Legal and regulatory: Banks are highly regulated and required to maintain liquidity, reserve requirements, and pledge against certain deposits.

Unique circumstances: Some potential unique circumstances include lack of diversification or lack of liquidity in the loan portfolio.