Alcoa 2012 Annual Report Download - page 155

assets relative to pension liabilities and achieving risk factor diversification across the balance of the asset portfolio. A
portion of the assets are matched to the interest rate profile of the benefit obligation through long duration fixed income
investments and exposure to broad equity risk has been decreased and diversified through investments in macro hedge
funds, equity long and short hedge funds, global and emerging market equities, and gold. Investments are further
diversified by strategy, asset class, geography, and sector to enhance returns and mitigate downside risk. A large
number of external investment managers are used to gain broad exposure to the financial markets and to mitigate
manager-concentration risk.
Investment practices comply with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA)
and any other applicable laws and regulations. The use of derivative instruments is permitted where appropriate and
necessary for achieving overall investment policy objectives. Currently, the use of derivative instruments is not
significant when compared to the overall investment portfolio.
In the course of managing the pension and other postretirement plans’ assets, trustees of the plans loan securities to
brokers/dealers in exchange for a fee. The securities are subsequently returned to the plans in accordance with the
brokerage agreement. In support of these transactions, the brokers/dealers provide collateral, which exceeds the value
of the securities loaned (102%-105%).
The following section describes the valuation methodologies used by the trustees to measure the fair value of pension
and other postretirement benefit plan assets, including an indication of the level in the fair value hierarchy in which
each type of asset is generally classified (see Note X for the definition of fair value and a description of the fair value
hierarchy).
Equities. These securities consist of direct investments in the stock of publicly traded U.S. and non-U.S. companies
and are valued based on the closing price reported in an active market on which the individual securities are traded. As
such, the direct investments are generally classified in Level 1. Also, these securities consist of the plans’ share of
commingled funds that are invested in the stock of publicly traded companies and are valued at the net asset value of
shares held at December 31. As such, these securities are included in Level 1 if quoted in an active market, otherwise
these investments are included in Level 2. Additionally, these securities include direct investments in short and long
equity hedge funds and private equity (limited partnerships and venture capital partnerships) and are valued by
investment managers based on the most recent financial information available, which typically represents significant
unobservable data. As such, these investments are generally classified as Level 3.
Fixed income. These securities consist of U.S. government debt and are generally valued using quoted prices. As such,
these securities are included in Level 1. Also, these securities include publicly traded U.S. and non-U.S. fixed interest
obligations (principally corporate bonds and debentures) and are valued through consultation and evaluation with
brokers in the institutional market using quoted prices and other observable market data. As such, these investments are
included in Level 2. Additionally, these securities include cash and cash equivalents, which consist of government
securities in commingled funds, and are generally valued using observable market data. As such, these funds are
included in Level 2. Furthermore, these securities consist of commercial and residential mortgage-backed securities
and are valued by investment managers based on the most recent financial information available, which typically
represents significant unobservable data. As such, these investments are generally classified as Level 3.
Other investments. These investments include, among others, exchange traded funds, macro hedge funds, real estate
investment trusts, and direct investments of private real estate. Exchange traded funds, such as gold, and real estate
investment trusts are valued based on the closing price reported in an active market on which the investments are traded, and,
therefore, are included in Level 1. Also, these securities consist of the plans’ share of commingled funds that are invested in
real estate investment trusts and are valued at the net asset value of shares held at December 31. As such, these securities are
generally included in Level 2. Direct investments of macro hedge funds and private real estate (includes limited partnerships)
are valued by investment managers based on the most recent financial information available, which typically represents
significant unobservable data. As such, these investments are generally classified as Level 3. If fair value is able to be
determined through the use of quoted market prices of similar assets or other observable market data, then the investments
are classified in Level 2.
The fair value methods described above may not be indicative of net realizable value or reflective of future fair values.
Additionally, while Alcoa believes the valuation methods used by the plans’ trustees are appropriate and consistent
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