Albertsons 2006 Annual Report Download - page 81

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SUPERVALU INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The company employs a total return approach whereby a mix of equities and fixed income investments are
used to maximize the long-term return of plan assets for a prudent level of risk. Alternative investments,
including hedge funds, private equity and real estate are also used judiciously to enhance risk adjusted long-term
returns while improving portfolio diversification. The overall investment strategy and policy has been developed
based on the need to satisfy the long-term liabilities of the company’s pension plans. Risk management is
accomplished through diversification across asset classes, multiple investment manager portfolios and both
general and portfolio-specific investment guidelines. Risk tolerance is established through careful consideration
of the plan liabilities, plan funded status and the company’s financial condition. This asset allocation policy mix
is reviewed annually and actual allocations are rebalanced on a regular basis.
Plan assets are invested using a combination of active and passive investment strategies. Passive strategies
invest in broad sectors of the market primarily through the use of indexing. Indexing is an investment
management approach based on investing in exactly the same securities, in the same proportions, as an index,
such as the S&P 500. The management style is considered passive because portfolio managers don’t make
decisions about which securities to buy and sell, they simply mimic the composition and weightings of the
appropriate stock or bond market index. Active strategies employ multiple investment management firms.
Managers within each asset class cover a range of investment styles and approaches and are combined in a way
that controls for capitalization, and style biases (equities), and interest rate bets (fixed income) versus benchmark
indices while focusing primarily on security selection as a means to add value. Monitoring activities to evaluate
performance against targets and measure investment risk take place on an ongoing basis through annual liability
measurements, periodic asset/liability studies and quarterly investment portfolio reviews.
The following table summarizes the actual allocation of our pension plan assets at the November 30
measurement date as well as our target allocation.
Asset Category
Target Allocation
Ranges
Plan Assets
Fiscal 2006
Plan Assets
Fiscal 2005
Domestic Equity 45.0% — 70.0% 60.1% 60.7%
International Equity 7.0% — 20.0% 9.9% 10.1%
Domestic Fixed Income 25.0% — 35.0% 24.5% 23.5%
Cash and Other 0.0% — 15.0% 5.5% 5.7%
Total 100.0% 100.0%
The expected long-term rate of return for plan assets was determined based on the projection of asset class
return expectations applied to the target asset allocation of the plan assets. Consideration was given to widely-
accepted capital market principles, long-term return analysis for global fixed income and equity markets, the
active total return oriented portfolio management style as well as the diversification needs and rebalancing
characteristics of the plan. Long-term trends were evaluated relative to market factors such as inflation, interest
rates and fiscal and monetary polices in order to assess the capital market assumptions.
The company reviews and selects the discount rate to be used in connection with its postretirement
obligations annually. In determining the discount rate, the company uses the yield on corporate bonds (rated Aa
or better) that coincides with the cash flows of the plans’ estimated benefit payouts. The model uses a yield curve
approach to discount each cash flow of the liability stream at an interest rate specifically applicable to the timing
of each respective cash flow. The model totals the present values of all cash flows and calculates the equivalent
weighted-average discount rate by imputing the singular interest rate that equates the total present value with the
stream of future cash flows. This resulting weighted-average discount rate is then used in evaluating the final
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