Q) What is the model used based on current and proposed allocation? (norway,endowment,LDI,canada)
A) Current is Norway, Proposed is Endowment model
Can someone please give the explanation for both? I’m aware Norway model invests in traditional assets, but given its a pension fund, why is the current model not liability driven?
They’re not asking you which model should be used, or why a particular model should be used.
Rather, they’re giving you an asset allocation and asking which model would have led you to use that particular asset allocation.
The current allocation is all passive and is 60-40 equity debt.
You should be able to recognize that as an example of Norway.
The proposed allocation has a large allocation in active funds and also some alternative assets like hedge funds.
That tells you it is likely either Canada or Endowment. One of the main differences between Canada and Endowment is that for Canada (CPP, the Canada Pension Plan) the asset management is done in house because Canada likes government. Endowment, the asset management is usually farmed out.
Here they will use publicly traded investment vehicles, so it is Endowment.
Fwiw, the blurb says the plan needs to earn 7% a year to keep pace with the liabilities, and the current allocation has an expected return of something like 6.3%, so less than required.
The proposed allocation has an expected return of 9.25%, so the required return is achieved.
Makes a lot more sense now, thanks a ton!
