Optimal Asset Allocation for ABC Pension Fund

Hard Institutional Portfolio Mgmt Pension Funds

ABC Corporate Pension Fund is undergoing a strategic assessment of its investment portfolio in light of recent regulatory changes. The fund has an actuarial liability of $800 million due in 15 years, and its current portfolio consists of a mix of equities, fixed income securities, and alternative investments. Recently, the fund's actuarial consultant has recommended an increase in exposure to inflation-linked assets to better align with the anticipated liabilities.

The fund currently allocates 40% to equities, 40% to fixed income, and 20% to alternatives, but it has not considered the impact of inflation on its liabilities. As the investment committee discusses the recommended changes, it must decide how best to adjust the allocation without increasing risk beyond its current risk tolerance levels.

Which of the following strategies would best align the pension fund's asset allocation with its inflation-linked liabilities while maintaining its risk profile?

Increase the equity allocation to 60% to leverage potential higher returns from the equity market.

Shift 20% of the fixed income allocation into inflation-linked bonds, reducing fixed income to 20%.

Increase the allocation to alternatives by 20%, enhancing diversification without addressing inflation.

Hint

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