Question

Interpret the comments:

“’Insurance company portfolio managers may serve as shareholder activists to implicitly control a corporations actions” and relate it to real life current events.

"If a life insurance company wants a portfolio manager to generate sufficient cash to meet expected payments to beneficiaries, it cannot expect the manager to achieve relatively high returns for the portfolio.”

Answer 1

1) Portfolio managers (PM) often are appointed by their customers as proxy to represent them in meetings of shareholders. Since customers of a PM are sacttered and may be less qualified, then rely upon PM to vote on certain important matters to the best of their interests. Since PM is acting on their behalf, he had fiduciary duty towrads his customers amd shall take decisions which aim to maximise thier wealth.

Now since insurnace company PM is acting on behalf of policy holders, he needs to protect their interests. Insurnace co may invest in many corporations ranging from banks to IT sector. Activist shareholder mean a shareholder who engage is vocal in press briefings, who keeps management under check, contest for minority shareholders. Basic purpose is to drive the company actively by keeping checks on mangement decisions such that shareholders interests are maximised. He can see real life businesses propositions, evaluate them, vote against unprofitable businesses and divestment.

2) Above statement is absolutely true. Basic rules of portfolio mangement require PM to have profilling of the investor. He needs to judge the time horizon of the customer as well liquidity requirements in between the horizon from the portfolio. Generally higher the time horizon higher the exepected return. Higher the liquidity requirement, lower the expected return. If the portflio needs to continually generate cash flows, it act as withdrawal from the portflio and for the purpose of meeting such regular outflows, PM need to invest in short term extremely liquid and safe securities such that he can easily meet those demands. Liquid securities offer very low rate of return and bring down the required rate of return from portfolio. Further at the time when securities are liquidated, markets may be plunging and forced sale may not fetch the fair market value leading to further pressure on portfolio.