Reference no: EM132478307
AGA IM is preparing for a meeting with a new prospective client - a pension plan for San Jose City government (SJCG) employee system. The plan has $4 billion in assets and currently invested in 20% US stocks, 70% US bonds, 10% commodities, and 10% in cash. Its annual liability is expected to be $100 million. Average beneficiary age is 74 years and average employee age is 31. Retirement age is set to 65. AGA is building an investment policy for SJCG. Identify the sections that are most appropriate for inclusion in the investment policy.
1. Return/Goal:
a. Preserve the value of the portfolio
b. Meet the expected liability towards plan beneficiaries on an annual basis
c. Minimize the year-to-year fluctuation in the portfolio returns
2. Primary Risk Faced by SJCG:
a. Currency
b. Interest Rates
c. Liquidity
3. Liquidity Needs:
a. Ensure that 10% of the portfolio can be liquidated in short time period
b. Ensure that the entire portfolio can be liquidated in 1-year
c. Liquidity is not a key concern for SJCG
4. Time-horizon:
a. 43 years
b. 34 years
c. Perpetual
5. Key Unique Consideration affecting SJCG's financial stability:
a. Stock market returns
b. Local population and employment base
c. Geopolitical events
Part B: AGA projects that the interest rates will rise from their current levels and that the global stock markets and commodities will have steady positive returns. What are the changes AGA should recommend to SJCG for adjusting their asset allocation. Why did you recommend these and what are possible drawbacks of your recommendations?