Option 1

问题如下：

Sabonete Case Scenario

Sabonete, S.A., is a multi-national consumer products company headquartered in Lisbon, Portugal, with annual revenue of approximately €2 billion. Over the past several years, the company’s growth strategy has centered on expanding market share in emerging markets. Over half of revenues are from emerging markets, and the remainder are from developed European economies. Oni Falana serves as the chief investment officer of Sabonete’s defined benefit pension plan (SPP).

Falana has engaged an outside consultant, Isabel Horvath, for assistance with asset allocation. Falana describes to Horvath the company’s key objectives with respect to the SPP:

• reach fully funded (100%) status in five years, at which point the liabilities will be fully hedged,

• minimize fluctuations in expected year-to-year required contributions, and

• minimize the administrative and investment costs associated with managing the fund.

Falana provides Horvath with the following key facts and assumptions regarding Sabonete and the SPP:

• The fund is closed to new employees, but existing employees continue to accrue benefits under the original terms.

• The fund is 90% funded (€5 billion in assets and an accrued benefit obligation of €5.55 billion).

• A €75 million contribution will be made to the fund at the end of this quarter. Future contributions are likely to be substantially smaller.

• The average participant is 45 years old, and employee turnover has been low.

• The salary growth rate is 3.2%

• The liability discount rate, currently 3.5%, is benchmarked to 10-year AA corporate bonds.

• The risk-free rate is currently 3.0%, and short-term interest rates are expected to remain stable.

• The current asset allocation and other statistics (expected return, volatility, and correlation with global equities) of each asset class are indicated in Exhibit 1.

Exhibit 1 SPP Current Asset Allocation and Other Statistics by Asset Class

Horvath starts by preparing an economic balance sheet for the SPP and makes the following notes:

• · Emerging market equities have a 10% weight in the global market portfolio. However, given the firm’s familiarity with and the opportunities they perceive in emerging markets, the SPP has historically been over-weighted (25%) in this asset class.

• · 60% of company revenue is from sales in emerging markets, of which half is attributable to sales in Africa. The revenue growth rate for Sabonete’s African business is high but very volatile. The firm’s revenues and profitability are quite sensitive to emerging markets.

• · The firm has significant investments in African real estate. It recently acquired several large parcels of land in Africa for €200 million and is planning to make a major investment in new manufacturing facilities to boost margins.

Based on these factors and the information from Exhibit 1, Horvath presents the current asset allocation of the plan along with two other options for consideration (see Exhibit 2).

Exhibit 2

Current and Proposed Asset Allocation Options

Recee Radell, an analyst in SPP’s pension office, makes the following statements regarding Option 1:

Horvath states, “Option 1 provides a 95% probability of meeting the goal of reaching fully funded status in five years, but interim contributions are likely to be quite variable. Option 2 is likely to result in a more stable contribution rate but with a lower probability of meeting the funding goal.”

Falana plans to recommend Option 2, believing that the greater certainty of meeting the required year-to-year contributions is the more important objective. She asks Radell to recommend a rebalancing policy for Option 2. He proposes the ranges shown in Exhibit 3 and provides an estimate of the related transaction costs.

Exhibit 3

Rebalancing Ranges for Option 2

Radell justifies his recommendation on the basis of the following statements:

• A wide rebalancing range for global fixed income is appropriate because of its low volatility, low transaction costs, and low correlation with other asset classes in the portfolio.

• The allocation for private equity is challenging because a low-cost passive investment vehicle does not exist and modeling with a private equity index captures only the return aspects of private equity without an appropriate representation of risk.

Falana discusses the recommended asset allocation with the Pension Committee. A new committee member, James D’Alessandro, states that his preference would be Option 1 because the best pension funds have adopted the endowment model of asset allocation, which has a higher allocation to alternative investments.

Question

Which of the following statements is the best response to D’Alessandro’s rationale for justifying Option 1 for the SPP’s asset allocation? The proposed model:

选项：

A.is not well suited to the SPP given its objective of fully funding and hedging its liabilities. B.would benefit the SPP because it can be expected to generate higher returns, more than offsetting the higher costs. C.has an inherent illiquidity premium, which will help Sabonete achieve its objective of fully funding the pension plan.

解释：

Solution

A is correct. D’Alessandro suggests that the endowment model should be used by the pension plan. The endowment model is not well suited to meeting Sabonete’s objectives. The model seeks to earn illiquidity premiums, which require a long-time horizon to capture. Because Sabonete plans to hedge its liabilities in five years, its investment horizon is too short to capture the illiquidity premium that is a critical component of the endowment model.

B is incorrect. The endowment model can be expected to generate higher returns because of the illiquidity premium, which would more than offset the higher costs. However, Sabonete’s investment horizon is too short to capture the illiquidity premium inherent in the model. Further, the higher costs of the model are inconsistent with Sabonete’s desire to minimize the investment and administrative costs associated with the plan.

C is incorrect. Sabonete’s investment horizon is too short to capture the illiquidity premium that is a critical component of the endowment model. Further, the higher costs of the model are inconsistent with Sabonete’s objective to minimize the investment and administrative costs associated with the plan.