 Hey guys, it's MJ the student actuary and I've recently done a TED talk around semantic studying where I discuss how everything is just Concepts joined up with relationships. So it's just concepts joined together So what I'm thinking of in this video is to actually show you a practical Example of it rather than explain the theory behind it like I did in the TED talk So what I have here is this is how a fund works Just like a general fund. It could be a pension fund where you have a board They have a company the employee employees and they set up a pension fund For their employees. They're known as the members who then elect Trustees who then get some expert advice to say what the asset strategy should be and they recommend the manager And they all try make money and there's compliance officers and all those type of things So we have all these people and their various relationships with each other And then what I've done Is I have made I have made these letters. So like with a manager running his fund He would you know, he has the manager. He's worried about his performance and his administration Go through his products it system his capacity You know all the issues that he might be facing monitoring with communication filling in reports duration How many assets management, you know, there's all these different focal points And then I've also done one for the consultant recommending the manager That's that one over there and I've also done one with the trustees monitoring the managers But what I want to do in this video is I want to do the investment strategy one. So this is If I just had to show it to you over here it is The expert who's normally the actuary Advising on asset allocation or setting up the investment strategy. So this link here I now want to go into a lot of detail So what I do when I make these lattices or these knowledge webs or whatever you want to call them Is I just do a big like dump of all the various concepts And now what I want to do is piece them together So I thought why not just record while I do this So what we have is the investment strategy Most important thing with the investment strategy is to know what your liabilities are And liabilities have certain objectives You know, you want to meet liabilities as they fall due So, you know, liquidity is an important one Liabilities might be more than the assets you've been given. You might be promising You know, 10 percent return every month or something crazy like that So, you know, growth will be another objective Or like they said a pension fund situation, you want to protect the person's money just before they, you know, retire So stability is a very important piece of the puzzle So from an investment strategy, you do want to keep an eye on your liabilities I mean, this whole thing is known as matching. Do I have matching? Yes, I do there's matching So this is this whole concept of matching your assets with your liabilities So that you can match them on certain things such as duration Do I have duration and all of that type of stuff? So sometimes I won't actually have the little Thing so I have to make a new one So let's Let's zoom in So let's make one there Durations So, okay, so why is duration? An important thing to match or because of interest rate sensitivity. So let's actually Make another one over here interest rate Sensei Tivity Interest rate sensitivity Okay, this is probably going to be a long video although you guys will know that because YouTube will tell you how long it is. I don't know how long I'm going to be recording this for But let's just see how it goes. So we've got the investment strategy important That you match it by duration and that's for your interest rate That sensitivity Okay Um What's other good thing to to match on another good thing to match on is liquidity as well. So what I'll do Even though that's an objective But also come here. So you can see I've got my little Arrows that I'll join I can now join duration to liquidity as well as objectives To liquidity so we can see liquidity You know is important in more More than one way Um Also a good thing to to match on is Is currency I don't think I have currency though But well, maybe I mean that falls under matching. I mean matching can do its whole A little thing should we do should we do currency on this? Let's do that as well. I just have to zoom in when I Create a new one Okay, so and you'll see that in a lot of the times you'll have regulation that says you can't put too much money in foreign assets Because they want this this matching by currency um I mean, I guess you could even match by liquidity portfolio as well So liquidity is quite an interesting one. It's got quite a lot of Joining up and the reason for that is you don't want reinvestment risk So let's maybe put that in over here investment risk So what reinvestment risk is I have to actually make this smaller reinvestment risk is when Let's say you have to pay out in ten years time But your asset is maturing after five years You then have to put it back into the market, but there is a there's the risk that the price would have moved um favorably And so you have to spend more money. Sorry, it's difficult to Change the size of the font and explain a risk at the same time. There we go Um, so your liquidity is important for reinvestment risk currency Okay, let's see what else we've got here. So you can see we You start building this up and you start switching it around and and doing all these things um I mean, you know, we could even throw in regulation There just to stand up with with the currency and the foreign Investments, but we'll move that one a little bit later um Where's allocation? Yeah I think allocation is an important part. So investment strategy You're looking at the liabilities, but you're also going to be looking at the whole asset allocation They should actually put a chair because that will be linking up worth matching okay, so There is certain, um, I guess y'all we can throw in the regulation Here, you know, there's certain authorized assets that we can and cannot use certain, you know restrictions But we still want to achieve Diversification so those two things will contradict each other, you know the more assets you can invest in the better I mean Let's see what else we've got over here Regulation will also tell us how much Like reserves we need to hold If we're going say very aggressively sometimes we have to hold more reserves where if we go very defensively We have to hold less reserves, but that's with some some funds not necessarily with all funds Um Let's see. Let's see I'm looking for I've got one where it says active or passive There we go okay So we also need to choose an investment strategy where we're going to go active or passive If we're going passive, you know, what's going to be the tracking error If we're going to go active what's going to be the active risk You know, we then have to choose our manager We then going to have to choose a style, you know, how is he going to be investing? Um, are we going to have any limits or the limits can also come with restrictions? Um, you know, what's our individual asset exposure? Or actually even just an individual instrument Products can also come into that one over there as well Um, I should maybe go Each asset clause first And then we have individual assets Uh, tax is always, you know, you always get like a mark for mentioning tax Um Risk budgets important Um asset manager, you know, what's his Style going to be or like this put style over there And I really got style so that is a duplicate Um mandate Mandate is important Um I guess there's the whole governance structure. I don't know. We put that in. There's another one of tax. Let's take that out We are going to try to figure out how we are going to Do the valuation of so these individual assets You know, what is the The governance behind choosing one What would be our various benchmark? Clients actually don't think we have to worry too much about client peer group risk can link up with the benchmark You know, maybe we're trying to outperform them Um, I mean risk and return these are like the two main ones That we always want to Want to consider, you know, what is our Our risk and return going to be Um Party we don't have to worry about vehicle. We can we can decide what type of vehicle it's going to come in as That will impact the tax Okay so Look, I want it all to be quite, you know joined together, but You know not just all over the place Um Now, I mean, so this is the thing this thing e it evolves. So it does take quite a bit of time And the fact that i'm recording it probably not the best thing because sometimes you just need to sit and like stare at it and figure out Okay, how are we going to join all of this together? Um, we definitely know that investments Are concerned with their liabilities Um Liabilities have their objectives objectives can be either growth stability and liquidity um We also know that liabilities have have duration And duration is important for Whoops interest rate sensitivity And duration is important for liquidity and liquidity is important for the investment risk And I guess for meeting meeting payments Um, so let me actually make another one. Let's make outflows Because we know when you come to these questions, they're kind of like discuss investment strategy for 20 mocks and you're like, okay um Where do I begin? But if you look here if we have to talk about each little pointer You know, I think we can quite comfortably find, um 20 mocks. I mean, I think we're looking at around. Yeah, there's around 20 bubbles here If not, no, no, there's around 40 little bubbles over here So we should be fine because at a half a mock each We will be able to answer a question if we touch on all of these things So Let's see how they all join up together and like I said, some of them we can discuss more than once because We've got your asset allocation Which needs to Make sure that it can do matching with The liabilities And we see we must keep matching Actually Hold on I want to use I want to use yeah Let's make it so that like ability goes into matching matching goes into duration Um matching also going to currency So we want to currency I mean what we can even do now is make foreign assets And I mean the last thing about this is this is kind of like dynamic studying in the sense that We can come in like just delete this stuff or rebuild it or something like that so we can see Currency because that goes into foreign investments Which is very important when it comes to authorized assets um I mean also whether it's active or passive also play a role with foreign investments Um, and I mean yeah these guys all come Come down to your overall risk. I guess it's called your risk budget. Do we have risk budget? Yeah, let's use risk budget Yeah, what is the total Total risk that we're taking on here Um, I mean because there's also going to be Market risk as well You should probably rename this one to market risk and credit risk um, so we're gonna have risk budget and Currency will also come into risk and then risk goes into Whoops that's weird Going to the risk budget the tracking error will also be important or risk Um You know how closely we track tracking error that's the index Yeah, let me actually include index as well You know what index are we going to use? And I mean yeah with index There's always the diversification thing as well with index Especially here in South Africa where Say an equity or even I mean The bond indices also very heavy on government bonds. They aren't that many corporate bonds So passive investing do have this problem with diversification Although if you go active you can Get the active risk. I think authorized assets is also going to team up with exposure Kind of feel restriction is maybe a little bit I mean I'm basically saying restrictions and regulation All right, I don't know maybe and you can Keep them as separate things Limits and exposure sounds a bit like the same thing for hey, so yeah, let's actually take limits out for the moment Keep exposure Although maybe keep that one there Exposure I want to instrument Party where's party? Did we throw away party? No because yeah, you will have On exposure limits to certain parties But hold them. Let's get our little arrows going So authorized assets We will have they'll be restricted I guess our Yeah, one of the restrictions will be to limit the exposure And we definitely going to limit the exposure To each asset class To instruments used and definitely to parties as well I don't have that other one Or let's use this one Here we go No, wait, sorry Although that we will have We'll have our party and I'm thinking should we bring restrictions I mean reserves will depend very much on exposure as well Which is why it's nice to have them there. Let's actually have individual Assets as well So something like, you know, you can't have all your property in one big shopping center I mean that will link Those guys up there There is a way to get I mean around like if they say you can only have 10 percent in equities and 10 percent in derivatives you can You know get a derivative that then You know, it's a synthetic exposure to equities So there are ways to getting around Restrictions and specifically the exposure thing Same as say foreign assets There a way to get around foreign assets is to invest in Shares in the stock market that have dual listing and have a lot of their profit in overseas territories so There is ways to get around that um, let's see Let's put in valuation You know, how will the valuation be done will be top down Or bottom up Well, they might be going into too much depth when it comes to investment strategy investment strategy still is very high level um, type of thing We will choose the benchmark though. I think the benchmark Is an interesting one to have especially when it comes to The turn by thinking You know both active risk and tracking error Or have a benchmark that they will Be accountable for The benchmark for the active risk will probably be higher Then for the tracking error of the passive The certain index might be used as the benchmark active risk will depend on Getting a manager A manager will want to beat the benchmark. You can see benchmarks are very important point Um, I mean, you're even the benchmark will specify the mandate so it will specify What benchmark has to do And manager to the mandate I mean, there could even be peer group With the benchmark to see how everybody else did Compared to the benchmark Or the peer group can also affect Just allocation in general, you know, if everybody's allocating in a certain way You might want to see how they're doing it Um That actually could have quite an interesting impact on say diversification You know, so if everyone's buying a certain share, should you also buy it to limit your peer group risk? that will that be reducing your diversification Will that influence your exposure? So you can see how all of these cars are very much You know Joined by the hip type of thing Now let's get this one here as well Okay, so you can see it's slowly starting to to take shape Um, yeah, let's connect this one here Our allocation has to You know be with the right amount of authorized assets Um, why is that because of regulation regulation? Regulation might also specify A reserve that we need to have And I want to link exposure To reserves or risk to reserves Something to reserve because reserves does You know come back to all of this And we've got a little hold there for how it's going to be done Um, I mean vehicle and tax will kind of go together But I do want to just click style Over here so managers will have their own specific styles So these are the ones we're not using yet How are we going to piece them together The limits are my rod if we don't keep limits in So how are we doing? It's not making a very nice shape though is it a You're not getting a nice like Paramount or anything that we did for the other ones Although investment strategy It's an interesting one It's a interesting interesting one I actually want to add in a few more Little things also when you Add in hedging strategy, I think that's an important One I also want to add in market capacity Especially when you're dealing with emerging markets market capacity Can throw a spanner in the work when it comes to investment strategies I mean that could even be quite quite up here We can even put these guys over here. I think Because allocation will depend You know if we've got that as it is authorized But also, you know, is it actually available or you know, does the market have capacity for it? What is the regulation around say hedging strategies? We're allowed to use derivatives And they should be able to reduce the reserves as they can reduce the risk It's interesting. So they team up here with risk again and Hmm Fairly enough market capacity might even mean that we have to Go into foreign investments as well. So you can see this I need to probably sit down and restructure this this lattice because we've got some Things that should be connected But I mean in a weird way everything is kind of connected to each other I mean, oh my gosh, we haven't even connected the turn yet Um, let's see how we're doing How are we doing? I mean the two main things to remember is that we are dealing with Liabilities and allocations. So it's the one thing that this lattice doesn't do is it doesn't ever see, you know What is the most important? thing And unless you give it a little bit of a heading you don't know to start, you know update investment strategy Hmm, I think that's the best I can come up with at the moment So like I said these I mean those other ones, you know have spent a bit of time on them and I've you know made them all nice Perfect, but this investment strategy thing. I think I'm gonna I'm gonna end the video here Because it's gonna be very boring me just making minor tweaks And let me go through some more material Maybe see if I can find a few more things to join up and and connect it But the end product might be completely different. This is just going to be say the first draft But that's the whole thing. It's it's dynamic learning. It's actually pulling pieces away connecting it reconnecting it I mean, this is how our brain works. We've got neurons with the little connections everywhere. So this is like a representation of an actuarial brain Out over here and then we then make the little connections um, I mean also when you do it for For property Which I'll do at a later stage property will be quite fun You can see there's the different concepts that I have to meet And then are you always doing it for the economy the economy? I'm saying, you know, if one of them goes up, how does it affect all the other ones? Um, because there was no way to connect all of these with just arrows. So I am still playing with this This way as a study method making these type of mind maps or you know, whatever you want to call them This one's quite cute. Scott color made all the connections and now it's going into each of those in depth But uh, but y'all there we go. I think let me end off this video I want to go have a drink of water my voice as you can hear is getting quite dry. So let me end it off there thanks guys so much for watching and Yeah, let me know if you enjoyed watching these type of videos of seeing me Study, you know in the whole thick of it or if you prepare the more Prefer the more presented type of videos with the presentations like I did in that video. Anyway, cheers