The Duration Of The Application Of Strategic Asset Allocation In Pension Funds

There are many study has approved that strategy asset allocation are the most important fact to the total returns. Enhanced liability consciousness suggests the need for a new approach to the definition of risk in the asset allocation process. The objective of the paper is to study the strategic allocation issues in the pension funds. The focus is on the duration match of portfolio and liabilities and on the optimal asset allocation of a pension fund.This essay includes three parts, describing the use of portfolio in the pension fund strategic asset allocation.. In part 1, it looks back the traditional asset allocation theory, the new development in asset allocation theory, and the concept of portfolio. In part 2, it indicates the main characters of pension fund, the structure of the pension fund liability stream, and suggests the influence on pension fund asset allocation. In part 3, it apply the concept of duration to liabilities when these are defined as a stream of nominal payments, to extend this approach to portfolios with both fixed income and equity components, to set up a model to match the durations of assets to liabilities. The first step in this direction would be some form of portfolio duration that encompasses not just the fixed income component, but all asset classes in the fund. The second step is to calculate liabilities duration. A liability framework for a given fund can be quite complex and may have many dimensions. However, one can assume that at least one clear-cut liability value can be defined that responds in a prescribed fashion to movements in interest rates. The last step is to match the durations of assets to liabilities, and get a benchmark for pension fund strategy asset allocation.Through the analysis of both qualitative and quantitative, this essay draws the conclusion: First of all, the concept of duration has proved to be a valuable tool in the fixed income area for gauging the sensitivity of present values to movements in interest rates. This tool can also be applied to liabilities when these are defined as a stream of nominal payments, and it would be highly desirable to extend this approach to portfolios with both fixed income and equity components. Secondly, matching the duration of a pension plan' s assets to the duration of its liabilities can minimize funding uncertainty associated with unexpected changes in discount rates. Thirdly, a closer look at the durations of bonds andequities, as well as the structure of the liability stream, suggests a clear and intuitively appealing method for choosing a pension fund benchmark asset mix.