Ford 2010 Annual Report Download - page 128

Notes to the Financial Statements
126 Ford Motor Company | 2010 Annual Report
NOTE 18. RETIREMENT BENEFITS (Continued)
Pension Plan Asset Information
Investment Objective and Strategies. Our investment objectives are to minimize the volatility of the value of our
U.S. pension assets relative to U.S. pension liabilities and to ensure assets are sufficient to pay plan benefits. Target
asset allocations, which were established in 2007 and which we expect to reach over the next several years, are about
30% public equity investments, 45% fixed income investments, and up to 25% alternative investments (e.g., private
equity, real estate, and hedge funds). Our largest non-U.S. plans (Ford U.K. and Ford Canada) have similar target asset
allocations and investment objectives and strategies.
Investment strategies and policies for the U.S. plans and the largest non-U.S. plans reflect a balance of risk-reducing
and return-seeking considerations. The objective of minimizing the volatility of assets relative to liabilities is addressed
primarily through asset diversification, partial asset – liability matching, and hedging. Assets are broadly diversified
across many asset classes to achieve risk-adjusted returns that in total lower asset volatility relative to the liabilities. Our
policy to rebalance our investments regularly ensures actual allocations are in line with target allocations as appropriate.
The fixed income target asset allocation partially matches the bond-like and long-dated nature of the pension liabilities.
Strategies to address the goal of ensuring sufficient assets to pay benefits include target allocations to a broad array of
asset classes that provide adequate return, diversification and liquidity.
All assets are externally managed and most assets are actively managed. Managers are not permitted to invest
outside of the asset class (e.g., fixed income, equity, alternatives) or strategy for which they have been appointed. We
use investment guidelines and recurring audits as tools to ensure investment managers invest solely within the investment
strategy they have been provided.
Derivatives are permitted for public equity and fixed income investment managers to use as efficient substitutes for
traditional securities and to manage exposure to foreign exchange and interest rate risks. Interest rate and foreign
currency derivative instruments are used for the purpose of hedging changes in the fair value of assets that result from
interest rate changes and currency fluctuations. Interest rate derivatives also are used to adjust portfolio duration.
Derivatives may not be used to leverage or to alter the economic exposure to an asset class outside the scope of the
mandate an investment manager has been given. Alternative investment managers are permitted to employ leverage
(including through the use of derivatives or other tools) that may alter economic exposure.
Significant Concentrations of Risk. Significant concentrations of risk in our plan assets relate to equity, interest rate,
and operating risk. In order to ensure assets are sufficient to pay benefits, a portion of plan assets is allocated to equity
investments that are expected over time to earn higher returns with more volatility than fixed income investments which
more closely match pension liabilities. Within equities, risk is mitigated by constructing a portfolio that is broadly
diversified by geography, market capitalization, manager mandate size, investment style and process. Ford securities
comprise less than 5% of the total market value of our assets in major worldwide plans.
In order to minimize asset volatility relative to the liabilities, a portion of plan assets are allocated to fixed income
investments that are exposed to interest rate risk. Rate increases generally will result in a decline in fixed income assets
while reducing the present value of the liabilities. Conversely, rate decreases will increase fixed income assets, partially
offsetting the related increase in the liabilities.
Operating risks include the risks of inadequate diversification and weak controls. To mitigate these risks, investments
are diversified across and within asset classes in support of investment objectives. Policies and practices to address
operating risks include ongoing manager oversight (e.g., style adherence, team strength, firm health, and internal risk
controls), plan and asset class investment guidelines and instructions that are communicated to managers, and periodic
compliance and audit reviews to ensure adherence.