Alcoa 2015 Annual Report Download - page 180

systematic macro hedge funds, long/short equity hedge funds, and global and emerging market equities. 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 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.
The following section describes the valuation methodologies used by the trustees to measure the fair value of pension
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: (i) 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
(generally classified in Level 1); (ii) 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 (included in Level 1 if quoted in
an active market, otherwise these investments are included in Level 2); and (iii) direct investments in long/short 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 (generally classified as Level 3).
Fixed income. These securities consist of: (i) U.S. government debt and are generally valued using quoted prices
(included in Level 1); (ii) 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 (included in Level 2); (iii) cash and cash equivalents, which consist of
government securities in commingled funds, and are generally valued using observable market data (included in Level
2); and (iv) 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 (generally
classified as Level 3).
Other investments. These investments include, among others: (i) exchange traded funds, such as gold, and real estate
investment trusts and are valued based on the closing price reported in an active market on which the investments are
traded (included in Level 1); (ii) 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 (generally included in Level 3, however, 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); and (iii) direct investments of discretionary and systematic macro
hedge funds and private real estate (includes limited partnerships) and are valued by investment managers based on the
most recent financial information available, which typically represents significant unobservable data (generally
classified as Level 3, however, 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
with other market participants, the use of different methodologies or assumptions to determine the fair value of certain
financial instruments could result in a different fair value measurement at the reporting date.
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