Graco 2012 Annual Report Download - page 87

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81
(5) Real estate investments are generally investments in limited partnerships, real estate investment trusts and similar vehicles that invest in real estate. The values of the investments are generally based on the
most recent financial reports of the investment vehicles. The managers of each of the investment vehicles estimate the values of the real estate assets underlying the real estate investments using third-party
appraisals and other valuation techniques and analysis.
(6) Cash and cash equivalents include investments in stable value funds. Stable value funds are generally invested in common trust funds and interest-bearing accounts.
(7) In the U.S. pension plan assets, certain equity and fixed income investments are held in separately managed investment accounts. The underlying investments in these separately managed accounts are
primarily publicly traded securities that are directly owned by the U.S. pension plan, and such investments have been valued using the quoted price as of December 31, 2012 and 2011. Accordingly, these
investments have been classified as Level 1 as of December 31, 2012 and 2011.
(8) Derivatives primarily consist of interest rate and inflation swaps relating to the Company’s international plans. Included in cash and cash equivalents is an amount of $31.4 million that relates to cash collateral
posted with third parties for the derivatives that are in a liability position as of December 31, 2012.
(9) Commodity assets primarily consist of exchange traded funds that have publicly quoted prices and are therefore classified as Level 1 investments.
A reconciliation of the change in the fair value measurement of the defined benefit plans’ consolidated assets using significant
unobservable inputs (Level 3) for 2012 and 2011 is as follows (in millions):
Venture
Capital and
Partnerships Real Estate Other Total
Fair value as of December 31, 2010 $ 47.4 $ 25.2 $ 0.5 $ 73.1
Realized losses — — (3.7)(3.7)
Unrealized gains (losses) 3.2 (0.5) 3.7 6.4
Purchases 3.5 3.6 — 7.1
Sales (7.8) — (0.5)(8.3)
Fair value as of December 31, 2011 $ 46.3 $ 28.3 $ — $ 74.6
Realized losses — (0.3) — (0.3)
Unrealized gains 2.7 2.6 — 5.3
Purchases 3.6 0.9 — 4.5
Sales (4.8)(3.8) — (8.6)
Fair value as of December 31, 2012 $ 47.8 $ 27.7 $ — $ 75.5
Investment Strategy
The Company has established formal investment policies for the assets associated with its pension plans. The objectives of the
investment strategies generally include maximizing long-term return at acceptable risk levels, diversifying among asset classes,
if appropriate, as well as establishing relevant risk parameters within each asset class. Investment policies reflect the unique
circumstances of the respective plans, and risk tolerance is established through consideration of plan liabilities, plan funded status
and corporate financial condition. Asset allocation targets are based on periodic asset liability and/or risk budgeting study results,
which help determine the appropriate investment strategies for acceptable risk levels. The investment policies permit variances
from the targets within certain parameters.
The target asset allocations for the Company’s U.S. pension plan and primary international pension plans are as follows as of
December 31, 2012:
Asset Category
Target
U.S. International
Equity 45% 23%
Fixed income 40 14
Insurance contracts 5 24
Cash and equivalents — 21
Other investments (1) 10 18
Total 100% 100%
(1) Other investments include private equity funds, hedge funds and real estate funds.
Expected Long-term Rate of Return on Plan Assets
The Company employs a building-block approach in determining the long-term rate of return for plan assets. Historical markets
are studied and long-term historical relationships between equities and fixed income are preserved consistent with the widely
accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market
factors, such as inflation and interest rates, are evaluated before long-term capital market assumptions are determined. The long-