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By Jon Stewart, Executive Vice President and CFO, Kentucky Employers’ Mutual Insurance
Two years have passed since the Finance and Investment Committee has reported on the annual investment survey. The biggest challenge this year was getting responses, with only 21 out of 38 members returning completed surveys. This represents a little more than half of the membership and warrants the question of whether this exercise is still worthwhile. Regardless of the answer to that question, we as a committee still believe it is important that we summarize the results of this year’s survey.
Information related to asset allocation and total return, along with 12 general financial questions, was asked of all investment staffs. Questions ranged from how portfolios are being managed, to the use of nontraditional investments and securities lending, to Sarbanes-Oxley (SOX).
Asset allocation responses were very similar to those received two years ago, only changing by a few percentage points for the various categories. Respondents’ overall allocation for fixed income, equities, cash and short-term and real estate were 69%, 21%, 6% and 2% respectively. The chart below displays the asset allocation of the 21 members who completed the survey.
Asset allocations vary considerably when comparing U.S. and Canadian members. U.S. average allocation for fixed income, equities and cash and short-term were 84%, 8% and 8% respectively. Canadian allocation averages 51% for equities, with 37% invested in fixed income and 5% in real estate.
Total return appears to be the measure that most use in monitoring the performance of their investment program. Total return from the group varied from 3% to 13% and is obviously a function of the asset allocation described above and the risk profile of the responding members. The composite total return for the group was 5.6%, with Canadian members averaging 12% and U.S. members returning around 4.5%.
Investment staffs were asked if they manage “any” of their own funds. As can be seen from the chart below, 38% manage a portion of their own portfolios. Of the eight members that answered yes, no one manages their entire portfolio. Five members manage only their cash and short-term positions, with three managing their fixed income investments.
We asked how many external investment managers were used. Surprisingly, three members utilize more than 10 investment managers, with an additional six members utilizing more than five. Almost all of these members have invested assets of at least a billion dollars.
A little less than one-third of those responding utilize performance based fees in compensating investment management services. This actually correlates to the number of external investment managers used, as all but one of those who use more than five investment managers utilize performance based fees.
Lastly, SOX remains an issue for most of us. The changes to the NAIC Model Audit Rule will be upon us before we know it. Only one of the members responding to the survey has adopted SOX; only seven have partially adopted.
These were a few of the highlights of the 2006 Investment Survey. To view the full survey, go to the members-only Library Section. Questions or comments regarding this article or the survey can be sent to jstewart@kemi.com.
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