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Portfolio Evaluation

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1) An Evaluation of Client Objectives and Constraints for the South Carolina State Pension Fund
South Carolina State Pension Fund’s key objectives can be summarised below:
 Provide an asset pool sufficient to meet the long-term pensions and benefits liabilities  Achieve a certain rate of return on the current pension assets for a given level of risk
As a government pension plan, the fund has some understandable constraints, which are:
 Need to invest in mature and stable large companies  Only a certain percentage of the fund could be invested in equities, meant to grow by +10% every year up to 40%  The remainder (up to 60%) to be invested in bonds
Their objective of achieving a certain rate of return is a necessary step to ensure the pension fund is able to meet its future pension liabilities. However, having unrealistic expectations can prove to be harmful where in their case a 1.5% discrepancy in expectations had led to a 120% increase in unfunded liability!
The investment constraint of having a pension fund made up majority of bonds can prove to be problematic. While it is true that bonds provide a steady income in terms of coupon plus the opportunity for capital appreciation; the fact that bond prices are inversely proportional to interest rates prove to be a risk for pension funds. Indeed, that is the case for South Carolina pension fund where in April 1996 the fund has lost $400mln due to a rise in interest rates.
Also their constraint of investing in mature and stable companies have the benefit of earning steady dividends and a lower level of risk (Claus and Thomas, 2001). But these companies have limited growth potential hence returns tend to be low and the state may find that they are not being able to earn the higher expected return to fund the sudden increase in pension liability.
2) Critically assess the benefits of adding…...

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