The target value investment rule provides a structure that can be used to strategically purchase specific assets to target some value on an aggregated portfolio basis. The most common use for this rule is to define a duration matching strategy for your portfolio.
Buying Assets
In a target value investment rule, assets are bought from 2 or more available asset allocations. Each allocation defines a group of one or more assets available for purchase. The value matching strategy will attempt to combine the available asset allocations in a way to strategically reach a target portfolio value. The remainder of this section will use a duration matching strategy as an example, but this can just as easily be used to achieve a target convexity or target portfolio earned rate or spread target (as just a few examples).
When creating a target value investment, there are several inputs you will need to specify
- Asset Level Value - This is a Product variable from your assets that will return a numeric value to be used as the value for each individual asset to be bought from the available allocations. This value will be used to try to reach the portfolio target.
- Portfolio Target Value - This is a Portfolio variable that returns a numeric value. This value should represent the target you are trying to reach with the investment rule. For example, you might use the weighted portfolio liability duration as the target here.
- Buy Order - This tells the investment rule how to order the available investments when trying to buy new assets. See more about buy/sell orders below.
- The allocations from which assets will be bought. Assets will only be bought at the allocation level (not using individual model points within each allocation). In order to specify buying of single assets, you will need to create an Asset Allocation with only that single model point available for purchase. There target value rule requires at least 2 asset allocations in order to process.
Selling Asset
The pro-rata investment rule applies to ALL in-force asset model points. Each model point will be reduced by a proportional amount. This amount is calculated by dividing the sales amount required by the sum of the market values of all assets.
When creating a target value sale rule, there are several inputs you will need to specify:
- Asset Level Value - This is a Product variable from your assets that will return a numeric value to be used as the value for each individual asset to be bought from the available allocations. This value will be used to try to reach the portfolio target.
- Portfolio Target Value - This is a Portfolio variable that returns a numeric value. This value should represent the target you are trying to reach with the investment rule. For example, you might use the weighted portfolio liability duration as the target here.
- Sell Order - This tells the investment rule how to order the available investments when trying to buy new assets. See more about buy/sell orders below.
If the sales amount is greater than the sum of the market values of all asset model points, an error will be logged and the run will fail.
Buy/Sell Order
If more than 2 assets are available during the buy/sell processing, then there is a potential for multiple solutions that the buy/sell rule can take to achieve the target value. The Buy Order or Sell order gives you the flexibility to define a prioritization for how assets are bought or sold.
The default option Distance From Target will attempt to buy or sell from the available pool of assets based on how close the Asset Level Value for each individual asset [allocation] is to the target it needs to buy or sell.
You also have the option to specify a Custom Sort Order of your own. When using the custom sort order, you can specify any numeric product level variable that exists on your assets to sort the available assets.
When buying and selling, SLOPE will sort all available assets into two groups:
- Assets with Asset Level Values above the target to buy/sell
- Assets with Asset Level Values below the target to buy/sell
Within each of these groups, the assets will be sorted in accordance with the specified Buy/Sell Order and then will be processed sequentially until the buying or selling is complete, or there are no more assets available to process.
What Happens When it Fails?
There are multiple situations where a target value investment rule can fail to achieve its target. It could be that the Portfolio Target Value is outside the range of available assets and buying/selling assets would only take you farther away from your target. Or possibly the investment Constraints prevent it from buying or selling in a way that can achieve the target. Regardless of the reason, when the investment rule fails to achieve its target, messages will be logged in the run log for the projection:
The investment strategy will then move on to the next rule in the investment strategy step to continue processing. This is done to allow you to specify what to do in a situation where the investment rule cannot achieve its goals.
It is highly recommended that you always include additional investment rules after a target value investment rule (such as a Pro-Rata Investment which has fewer requirements) to be used in any situation where the target value rule cannot succeed.