(1) NI established a separated Pension and Retirement Committee (PRC) to substitute the old Executive Committee of the Board of Directors in making investment decisions. Because the Board of Directors found it was difficult to allocate much time and effort to the pension area.
(2) They selected a policy of 70:30 equity: bonds as an appropriate long-run average asset mix, however the equity component could vary in the short run to as high as 80% or as low as 55% according to the market conditions. That’s because the old asset allocation decision did not perform very well. They also selected an investment consulting firm to oversee the total asset and manager allocation process.
(3) They have decided to divide total fund among a fixed income money manager which was allocated 30% of the total fund initially, a passive equity fund (or core fund) manager which was allocated 28% initially, and four new specialized equity money manager which was allocated 10.5% each initially. These new money managers replaced the five old money managers (including two equity money managers which only invested in equity and three balanced managers which held both debt and equity) which underperformed benchmark during the early 1970s in both market-timing and stock-picking. NI also established an Investment Advisory Board (IAB), in which money managers, together with PRC, collectively decided on the asset mix and distribution of funds among themselves.
2. How effective is the role played by the core fund in the new structure and how, if at all, would you reform it?
(1) The core fund seemed to be well-positioned to fulfill its duty in providing diversification and reducing transaction costs.
Its residual risk was only 1.6% while Beta (1.07) was a little bit higher than expected (1.00). That’s probably because of its transactions with...