I saw the phrase “total return approach” appear in many parts of curriculum, just wondering if NOT “total return approach”, what other approach we got? When total return approach is not appropriate, what else? many thx.
The other approach is income approach where you try to maximize your income from given investments (invest in high yield bonds or high dividend stocks). You will try to preserve principal. That is earn money from only income not capital gains.
what if you got, oh i dunno, a defined benefit pension as your institutional IPS? ALM, baby.
* Cap. app. only approach * Cap. preservation only approach * Income only approach Would be opposite of Total return approach
bannisja Wrote: ------------------------------------------------------- > what if you got, oh i dunno, a defined benefit > pension as your institutional IPS? > ALM, baby. ALM is completely consistent with a total return approach.
jbaphna Wrote: > Would be opposite of Total return approach I don’t know…ALM is focus on immunization, isn’t it? matching liability. total return approach is maximise gain(income and capital)
Ok, so just to clarify, there are two different conceptual comparisons going on here… 1) AO vs ALM 2) Focusing on Total Return vs Focusing only on Income (or only on Capital Gains). These two comparisons are mutually exclusive (apples to oranges). It doesn’t make sense to compare ALM to Total Return.
well i think you can compare them both… for defined benefit plans- liability is the main focus, so the return objective will be ALM based for endowments on the other hand, the focus is a) to meet the spending requirment - income approach b) also preserve real value and grow the fund for future generations (cap gain) so putting a & b together, its called total return approach.
v.raghavan Wrote: ------------------------------------------------------- > well i think you can compare them both… > > for defined benefit plans- liability is the main > focus, so the return objective will be ALM based > I agree with abushey31. In a DB plan, you can use the income approach to match the liabilities of retired workers and also use the surplus (cap. gain approach) for future workers. Making it a total return approach.
Interest spread and net interest spread for banks and life insurance companies respectively.
all i’m saying is that when the IPS gives me a defined benefit plan, i am not writing in my return section “total return approach”, i’m writing ALM framework. give me an endowment, you will see those 3 words on my paper. and what bell said for banks or life insurance. these are must memorize things for the Inst. IPS… these are them.
You guys are discussing return objectives. The points you have made are return objectives NOT return requirement. Return requirement according to the texts is to “Always seek a total return approach to…” Unless specified that the client was using an income approach and wanted to continue I would for sure have that statement in the return requirement section. As for immunization and ALM. The definition of immunization is total return. PV of Assets >= PV of Liabilities at all times with an asset that contains a longer duration on both ends. The liability is judged via a total return perspective, discount rate goes up as rates move up, discount rate goes down as rates move down. The asset pool also needs to focus on total return to offset the gains/losses in the liability pool which is total return based. Market value risk and cash flow risk in ALM, the definition of total return… If you don’t see specific statements regarding a return requirement. Then it is maximize interest spread/margin subject to regulatory holding requirements and liquidity constraints, focus is on liquid securities. Total return approach to maximize inflation adjusted value after spending congruent with risk tolerance. Focus on maximization of surplus congruent with stated risk tolerance and regulatory requirements, etc.
Just to follow up, Total Return is the standard for ALL investors now. It’s more sophisticated than an Income-only approach. Income-only was the standard pre-1950s (e.g. Dividend yield, Coupon yields, etc are all income-only metrics). Then people figured out that capital gains matter too (go figure). The income-only approach was leading institutional investors to gravitate toward high-yield bonds and high dividend-yield stocks. They discuss this in the CFA curriculum somewhere…don’t have my book open at the moment.
abushey31 Wrote: ------------------------------------------------------- > Just to follow up, Total Return is the standard > for ALL investors now. It’s more sophisticated > than an Income-only approach. Income-only was the > standard pre-1950s (e.g. Dividend yield, Coupon > yields, etc are all income-only metrics). Then > people figured out that capital gains matter too > (go figure). The income-only approach was leading > institutional investors to gravitate toward > high-yield bonds and high dividend-yield stocks. > They discuss this in the CFA curriculum > somewhere…don’t have my book open at the moment. Absolutely…it is many places in the curriculum.
Its yield approach versus total return approach depending on liquidity needs.