Ford 2011 Annual Report Download - page 135

Notes to the Financial Statements
Ford Motor Company | 2011 Annual Report 133
NOTE 17. RETIREMENT BENEFITS (Continued)
Pension Plan Asset Information
Investment Objective and Strategies. Our investment objectives for the U.S. plans 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.
Our prior target asset allocations disclosed in our 2010 Form 10-K Report were about 30% public equity investments, 45%
fixed income investments, and up to 25% alternative investments (e.g., private equity, real estate, and hedge funds). In
October 2011, as part of our broader pension de-risking strategy, we revised our U.S. investment strategy to increase the
matching characteristics of our assets relative to our liabilities. Our new U.S. target asset allocations, which we expect to
reach over the next several years, are 80% fixed income and 20% growth assets (primarily alternative investments, which
include hedge funds, real estate, private equity, and public equity). Our largest non-U.S. plans (Ford U.K. and Ford
Canada) have similar investment objectives to the U.S. plans. Their prior target asset allocations were 45% fixed income
investments, 30% public equity investments, and up to 25% alternative investments. We expect to reach target asset
allocations similar to the new U.S. target asset allocations over the next several years, subject to legal requirements in
each country.
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 - liability matching, asset diversification, and hedging. The fixed income target asset allocation
matches the bond-like and long-dated nature of the pension liabilities. Assets are broadly diversified within 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. Strategies to address
the goal of ensuring sufficient assets to pay benefits include target allocations to a broad array of asset classes, and
strategies within asset classes that provide adequate returns, 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, public 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 fixed income investment and public equity managers to use as efficient substitutes for
traditional securities and to manage exposure to interest rate and foreign exchange 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 interest rate, equity,
and operating risk. In order to minimize asset volatility relative to the liabilities, a portion of plan assets is 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.
In order to ensure assets are sufficient to pay benefits, a portion of plan assets is allocated to growth assets (equity
investments and alternative 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. Within alternative investments, risk is similarly mitigated by constructing a portfolio that is broadly diversified by
asset class, investment strategy, manager, style and process.
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.