Fund Management

1
Fund Management
PA 546 Constantine Hadjilambrinos

• Lecture 14
• December 6, 2005

2
Cash Management
PA 546 Constantine Hadjilambrinos

• Accelerate collections.
• Control disbursements.
• Consolidate balances.
• Invest idle funds.

3
Cash investment strategy
PA 546 Constantine Hadjilambrinos

• Forecast cash flows.
• Undertake prudent investments.
• No default risk (no commercial securities).
• No credit market risk (only short term
  securities).
• No artificially low rates of return (no tax-free
  interest bonds).
• No illiquid assets.
• Observe special limits placed by federal, state,
  and local laws.

4
Public Employee Retirement Funds
PA 546 Constantine Hadjilambrinos

• State and local government employee retirement
  funds gt 2.5 trillion

5
Public Employee Retirement Fund Management
PA 546 Constantine Hadjilambrinos

• Almost all public employee retirement plans
  include a defined benefit option.
• Defined benefit option pays employee a certain
  annual amount (based, in some way, on annual
  salary).
• This amount stays the same for the retired
  employees lifetime and often increases with
  inflation.
• Employee contributes a fixed portion of his/her
  salary, most often matched by employer, to a
  retirement fund.
• This capital must be invested so as to be able to
  produce the funds needed when the employee
  retires.

6
Employer has two options for funding defined
benefit plans
PA 546 Constantine Hadjilambrinos

• Pay-as-you-gocurrent contributions fund current
  benefits.
• Actuarial fundingcurrent contributions fund
  future benefits.

7
Actuarial funding requires effective management
PA 546 Constantine Hadjilambrinos

• Fund manager must estimate accurately employees
  lifespan.
• Adequate funds must be invested during employees
  working years.
• Funds must be invested in a way that will
  generate adequate returns to fund guaranteed
  benefits.
• Investment risk is born by employer.

8
Appropriate Investments
PA 546 Constantine Hadjilambrinos

• Long-term investmentshigh return potential.
• Short-term investmentsnecessary to actually pay
  benefits.
• Creditworthiness.
• Liquidity.
• Market rate of return.

9
Defined contribution plans
PA 546 Constantine Hadjilambrinos

• Employee contributes amounts (often matched by
  employer) to a fund managed by employee.
• Most private and public employers offer this
  option.
• The only option offered by most private
  employers.
• Higher portability than defined benefit plans.
• Investment risk borne by employee.

10
Infringements on pension fund management
PA 546 Constantine Hadjilambrinos

• Use of pension funds by employer as market for
  its debtor stock.
• Political use of funds by governmentloans,
  sale/lease-back of government assets, delayed
  contributions.
• Unwise restrictions of investmentto local firms,
  social investing, economically targeted
  investing.
• Size of pension funds can impact private sector.

11
Effects of differential growth rates
PA 546 Constantine Hadjilambrinos
Year 0
Year 5
Year 7