Dow Chemical 2012 Annual Report Download - page 145

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Plan Assets
Plan assets consist mainly of equity and fixed income securities of U.S. and foreign issuers, and may include alternative
investments such as real estate, private equity and absolute return strategies. At December 31, 2012, plan assets totaled
$17.7 billion and included no Company common stock. At December 31, 2011, plan assets totaled $16.1 billion and included
directly held Company common stock with a value of less than $1 million (less than 1 percent of total plan assets). In 2013, the
Company expects to receive approximately $35 million from residual plan assets after the completion of a non-U.S. pension
plan wind-up.
Investment Strategy and Risk Management for Plan Assets
The Company’s investment strategy for the plan assets is to manage the assets in relation to the liability in order to pay
retirement benefits to plan participants while minimizing cash contributions from the Company over the life of the plans. This
is accomplished by identifying and managing the exposure to various market risks, diversifying investments across various
asset classes and earning an acceptable long-term rate of return consistent with an acceptable amount of risk, while considering
the liquidity needs of the plans.
The plans are permitted to use derivative instruments for investment purposes, as well as for hedging the underlying asset
and liability exposure and rebalancing the asset allocation. The plans use value at risk, stress testing, scenario analysis and
Monte Carlo simulations to monitor and manage both risk in the portfolios and surplus risk.
Equity securities primarily include investments in large- and small-cap companies located in both developed and emerging
markets around the world. Fixed income securities include investment and non investment grade corporate bonds of companies
diversified across industries, U.S. treasuries, non-U.S. developed market securities, U.S. agency mortgage-backed securities,
emerging market securities and fixed income funds. Alternative investments primarily include investments in real estate,
private equity limited partnerships and absolute return strategies. Other significant investment types include various insurance
contracts; and interest rate, equity, commodity and foreign exchange derivative investments and hedges.
Strategic Weighted-Average Target Allocation of Plan
Assets for All Significant Plans
Asset Category Target Allocation
Equity securities 39%
Fixed Income securities 38%
Alternative investments 22%
Other investments 1%
Total 100%
Concentration of Risk
The Company mitigates the credit risk of investments by establishing guidelines with investment managers that limit
investment in any single issue or issuer to an amount that is not material to the portfolio being managed. These guidelines are
monitored for compliance both by the Company and external managers. Credit risk related to derivative activity is mitigated by
utilizing multiple counterparties and through collateral support agreements.
The Northern Trust Collective Government Short Term Investment money market fund is utilized as the sweep vehicle for
one of the largest U.S. plans, which from time to time can represent a significant investment. For one U.S. plan, approximately
half of the liability is covered by a participating group annuity issued by Prudential Insurance Company.