Defined Benefit

The Trustees of a Defined Benefit pension plan have a problem. Each year, the company receives information from their actuary letting them know how much of a contribution they are required to make to the plan. For several years now the trustees, all of whom are participants in this plan, have been surprised by the number that their actuary has given them. In 2007, each was able to contribute significantly less than he had expected (which meant more taxable income) and in 2008 he wound up having to contribute more. The Trust’s financial advisor explained to him that there is an actuarial rate of return assumption that is factored into the year’s contribution. If the underlying investments outperform this assumed rate of return, the next year’s contribution is limited. If the investments underperform, the company must make a larger contribution the following year. The Trustees want an investment that has the potential to achieve the assumed rate of return but with less volatility. The financial advisor, a wise and savvy investor himself, suggests the California Investment Trust Optima Total Portfolio. In this strategy, California Investment Trust’s portfolio management team first builds an asset allocation using the principles of Model Portfolio Theory to select an allocation of debt and equity securities that falls along the efficient frontier – the lowest level of risk for a targeted rate of return. Then they overlay covered calls, which has been proven to further reduce volatility.

Option trading is not suitable for all investors. Investors should read and understand the Characteristics and Risks of Standardized Options.