UPS 2012 Annual Report Download - page 86

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Certain investments’ estimated fair value is based on unobservable inputs that are not corroborated by observable market
data and are thus classified as Level 3. These investments include commingled funds comprised of corporate and government
bonds, hedge funds, real estate investments and private equity funds. The commingled funds are valued using net asset values,
adjusted, as appropriate, for investment fund specific inputs determined to be significant to the valuation. Investments in hedge
funds are valued using reported net asset values as of December 31. These assets are primarily invested in a portfolio of
diversified, direct investments and funds of hedge funds. Real estate investments and private equity funds are valued using fair
values per the most recent partnership audited financial reports, adjusted as appropriate for any lag between the date of the
financial reports and December 31. The real estate investments consist of U.S. and non-U.S. real estate investments and are
broadly diversified. The fair values may, due to the inherent uncertainty of valuation for those alternative investments, differ
significantly from the values that would have been used had a ready market for the alternative investments existed, and the
differences could be material.
As of December 31, 2012 and 2011, $2.960 and $3.895 billion of plan assets are held in commingled stock funds that
hold U.S. and international public market securities. The plans held the right to liquidate positions in these commingled stock
funds at any time, subject only to a brief notification period. No unfunded commitments existed with respect to these
commingled stock funds at December 31, 2012.
As of December 31, 2012 and 2011, the plans hold $2.455 and $2.302 billion of investments in limited partnership
interests in various private equity and real estate funds. Limited provision exists for the redemption of these interests by the
general partners that invest in these funds until the end of the term of the partnerships, typically ranging between 12 and 18
years from the date of inception. An active secondary market exists for similar partnership interests, although no particular
value (discount or premium) can be guaranteed. At December 31, 2012, unfunded commitments to such limited partnerships
totaling approximately $626 million are expected to be contributed over the remaining investment period, typically ranging
between three and six years.
As of December 31, 2012 and 2011, $4.191 and $2.743 billion of plan investments are held in hedge funds that pursue
multiple strategies to diversify risk and reduce volatility. Most of these funds allow redemptions either quarterly or semi-
annually after a two to three month notice period, while other funds allow for redemption after only a brief notification period
with no restriction on redemption frequency. No unfunded commitments existed with respect to these hedge funds as of
December 31, 2012.
The following tables presents the changes in the Level 3 instruments measured on a recurring basis for the years ended
December 31, 2012 and 2011 (in millions):
Corporate
Bonds
Hedge
Funds
Real
Estate
Private
Equity Other Total
Balance on January 1, 2011 $ 193 $ 1,765 $ 789 $ 1,309 $ 258 $ 4,314
Actual Return on Assets:
Assets Held at End of Year (14) 69 144 145 53 397
Assets Sold During the Year 3 22 5 — — 30
Purchases 57 457 150 164 300 1,128
Sales (159) (181)(140)(264) — (744)
Settlements — — — — — —
Transfers Into (Out of) Level 3 — — — — — —
Balance on December 31, 2011 $ 80 $ 2,132 $ 948 $ 1,354 $ 611 $ 5,125
Actual Return on Assets:
Assets Held at End of Year 1 59 85 163 151 459
Assets Sold During the Year (3) 5 4 — — 6
Purchases 71 1,300 144 184 600 2,299
Sales (11) (667)(142)(285) — (1,105)
Settlements — — — — — —
Transfers Into (Out of) Level 3 — — — — — —
Balance on December 31, 2012 $ 138 $ 2,829 $ 1,039 $ 1,416 $ 1,362 $ 6,784