IBM 2014 Annual Report Download - page 140

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Notes to Consolidated Financial Statements
International Business Machines Corporation and Subsidiary Companies
139
Investment Policies and Strategies
The investment objectives of the Qualified PPP portfolio are
designed to generate returns that will enable the plan to meet
its future obligations. The precise amount for which these obli-
gations will be settled depends on future events, including the
retirement dates and life expectancy of the plans’ participants.
The obligations are estimated using actuarial assumptions, based
on the current economic environment and other pertinent factors
described on pages 137 through 138. The Qualified PPP portfolio’s
investment strategy balances the requirement to generate returns,
using potentially higher yielding assets such as equity securi-
ties, with the need to control risk in the portfolio with less volatile
assets, such as fixed-income securities. Risks include, among
others, inflation, volatility in equity values and changes in interest
rates that could cause the plan to become underfunded, thereby
increasing its dependence on contributions from the company. To
mitigate any potential concentration risk, careful consideration is
given to balancing the portfolio among industry sectors, compa-
nies and geographies, taking into account interest rate sensitivity,
dependence on economic growth, currency and other factors
that affect investment returns. In 2014, the company changed its
investment strategy, modifying the target asset allocation, primarily
by reducing equity securities and increasing debt securities. This
change was designed to reduce the potential negative impact that
equity markets might have on the funded status of the plan. As a
result, the Qualified PPP portfolio’s target allocation is 33percent
equity securities, 57percent fixed-income securities, 5percent
real estate and 5percent other investments.
The assets are managed by professional investment firms
and investment professionals who are employees of the com-
pany. They are bound by investment mandates determined by
the company’s management and are measured against specific
benchmarks. Among these managers, consideration is given, but
not limited to, balancing security concentration, issuer concentra-
tion, investment style and reliance on particular active and passive
investment strategies.
Market liquidity risks are tightly controlled, with $6,229 million
of the Qualified PPP portfolio invested in private market assets
consisting of private equities and private real estate investments,
which are less liquid than publicly traded securities. As of Decem-
ber 31, 2014, the Qualified PPP portfolio had $2,629 million in
commitments for future investments in private markets to be made
over a number of years. These commitments are expected to be
funded from plan assets.
Derivatives are used as an effective means to achieve
investment objectives and/or as a component of the plan’s risk
management strategy. The primary reasons for the use of deriva-
tives are fixed income management, including duration, interest
rate management and credit exposure, cash equitization and to
manage currency and commodity strategies.
Outside the U.S., the investment objectives are similar to those
described above, subject to local regulations. The weighted-aver-
age target allocation for the non-U.S. plans is 32percent equity
securities, 56percent fixed-income securities, 2percent real
estate and 10percent other investments, which is consistent with
the allocation decisions made by the company’s management.
The table on page 140 details the actual equity, fixed income,
real estate and other types of investments for non-U.S. plans. In
some countries, a higher percentage allocation to fixed income
is required to manage solvency and funding risks. In others, the
responsibility for managing the investments typically lies with a
board that may include up to 50percent of members elected
by employees and retirees. This can result in slight differences
compared with the strategies previously described. Generally,
these non-U.S. plans do not invest in illiquid assets and their use
of derivatives is consistent with the U.S. plan and mainly for cur-
rency hedging, interest rate risk management, credit exposure
and alternative investment strategies.
The company’s nonpension postretirement benefit plans are
underfunded or unfunded. For some plans, the company main-
tains a nominal, highly liquid trust fund balance to ensure timely
benefit payments.