Summary Institutional Investors
Table of Contents
Opening lecture ...................................................................................................................................... 6
How to do the “pension math” ............................................................................................................ 13
Strategic Asset Allocation ..................................................................................................................... 15
The impact of costs on Asset Allocation .............................................................................................. 17
Alternative Investments: Private Equity ............................................................................................... 18
Alternative Investments: Real Estate .................................................................................................... 20
Alternatives Investments: Infrastructure .............................................................................................. 22
Relevance of ESG information .............................................................................................................. 23
Active Ownership .................................................................................................................................. 24
Philips Guest Lecture – Dr. Arian Borgers ............................................................................................. 26
1
,Overview:
• 2 hours, 3 open questions, closed book, you can use a non-programmable calculator (see
Syllabus for types that are allowed), no dictionary allowed
• Questions are a combination of theory (articles and lectures) and application of the theory
(assignments)
• All required materials can be tested. Next to the articles labeled as required for the exam this
includes lectures and the findings from the tutorial meetings
• You need to be able (for each required article) to reproduce the main findings and what
the implications are for Institutional investors
• Emphasis is on interpretation, not calculations
• No need to learn formulas by heart
• No need to be able to reproduce statistical tests
• No trick questions from footnotes or appendices
1. ALM: Whats the goal (paying liabilities)
⁃ Discount rate important - sometimes set to high, which lowers the current liabilities -
creates a more rosy picture
⁃ 2 pillars DB and defined contribution (shifts the responsibility to the employee)
2. SAA: You need to invest in assets to meet your long term liabilities
⁃ Investment horizon is highly important - the longer the horizon, the more risk you can
take - because in the long run the risk gets smaller because of time diversification
3. TAA: Active or passive asset allocation - Core satellites
< PE
< Infrastructure
< Real estate
< ESG investing
Week 1
- Understand basic pension system
o 3 pillars
o Defined benefit vs. Defined contributions (pillar 2)
- Challenges for pension funds
o Longevity
o Low interest rates
o Low returns
- As a results of that switch from DB to DC, risk passed to employees
2
, Week 2
o How much to save in order to meet the objective?
o Determine Liabilities
- These can be manipulated
o Why? To hide a deficit and gamble resurrection
- Communication is key
Week 1 and 2
1. My objective - liabilities
2. Find Assets to meet these objectives (ALM)
3. Where to put the money in the long term (SAA)
4. How to beat the average (TAA)
Week 3
⁃ How do liabilities influence the assets you choose?
⁃ Risk-return is not constant but varies over time
⁃ Equities become less risky at longer horizons (due to time diversification)
⁃ So the asset mix in influenced by time horizon till the objective
⁃ Active vs. Passive Management
⁃ Majority is active
⁃ Overconvidence by retail and marketing power to beat the market
⁃ Institutional investors move to core-satellite -> 2 buckets (on with assets with which they cannot
beat the market -> go passive and a second with which beating the market is possible (PE,
Infrastructure, Real Estate) -> go active)
⁃ Goal: To lower fees, which has significant long-term effect on investment outcomes
Week 4
⁃ PE
⁃ Buyout vs. VC fund
⁃ Outperforms public market
⁃ Illiquidity premium
⁃ Skill
⁃ Market inefficiency
⁃ Long term investment
⁃ Lot of dry powder (money waiting being invested -> overpaying for deals)
⁃ Real estate
⁃ Public investment - indirect investment
⁃ Private investment - direct investment
⁃ Valuation private is delayed
⁃ Leads to smoothing
3
Table of Contents
Opening lecture ...................................................................................................................................... 6
How to do the “pension math” ............................................................................................................ 13
Strategic Asset Allocation ..................................................................................................................... 15
The impact of costs on Asset Allocation .............................................................................................. 17
Alternative Investments: Private Equity ............................................................................................... 18
Alternative Investments: Real Estate .................................................................................................... 20
Alternatives Investments: Infrastructure .............................................................................................. 22
Relevance of ESG information .............................................................................................................. 23
Active Ownership .................................................................................................................................. 24
Philips Guest Lecture – Dr. Arian Borgers ............................................................................................. 26
1
,Overview:
• 2 hours, 3 open questions, closed book, you can use a non-programmable calculator (see
Syllabus for types that are allowed), no dictionary allowed
• Questions are a combination of theory (articles and lectures) and application of the theory
(assignments)
• All required materials can be tested. Next to the articles labeled as required for the exam this
includes lectures and the findings from the tutorial meetings
• You need to be able (for each required article) to reproduce the main findings and what
the implications are for Institutional investors
• Emphasis is on interpretation, not calculations
• No need to learn formulas by heart
• No need to be able to reproduce statistical tests
• No trick questions from footnotes or appendices
1. ALM: Whats the goal (paying liabilities)
⁃ Discount rate important - sometimes set to high, which lowers the current liabilities -
creates a more rosy picture
⁃ 2 pillars DB and defined contribution (shifts the responsibility to the employee)
2. SAA: You need to invest in assets to meet your long term liabilities
⁃ Investment horizon is highly important - the longer the horizon, the more risk you can
take - because in the long run the risk gets smaller because of time diversification
3. TAA: Active or passive asset allocation - Core satellites
< PE
< Infrastructure
< Real estate
< ESG investing
Week 1
- Understand basic pension system
o 3 pillars
o Defined benefit vs. Defined contributions (pillar 2)
- Challenges for pension funds
o Longevity
o Low interest rates
o Low returns
- As a results of that switch from DB to DC, risk passed to employees
2
, Week 2
o How much to save in order to meet the objective?
o Determine Liabilities
- These can be manipulated
o Why? To hide a deficit and gamble resurrection
- Communication is key
Week 1 and 2
1. My objective - liabilities
2. Find Assets to meet these objectives (ALM)
3. Where to put the money in the long term (SAA)
4. How to beat the average (TAA)
Week 3
⁃ How do liabilities influence the assets you choose?
⁃ Risk-return is not constant but varies over time
⁃ Equities become less risky at longer horizons (due to time diversification)
⁃ So the asset mix in influenced by time horizon till the objective
⁃ Active vs. Passive Management
⁃ Majority is active
⁃ Overconvidence by retail and marketing power to beat the market
⁃ Institutional investors move to core-satellite -> 2 buckets (on with assets with which they cannot
beat the market -> go passive and a second with which beating the market is possible (PE,
Infrastructure, Real Estate) -> go active)
⁃ Goal: To lower fees, which has significant long-term effect on investment outcomes
Week 4
⁃ PE
⁃ Buyout vs. VC fund
⁃ Outperforms public market
⁃ Illiquidity premium
⁃ Skill
⁃ Market inefficiency
⁃ Long term investment
⁃ Lot of dry powder (money waiting being invested -> overpaying for deals)
⁃ Real estate
⁃ Public investment - indirect investment
⁃ Private investment - direct investment
⁃ Valuation private is delayed
⁃ Leads to smoothing
3
