The Asset Allocation consists of the procedure of selecting the investment percentages of the total portfolio of the Fund in different Asset classes. That is the implementation of the long term investment strategy of the Fund. The most substantial classes are Cash, Shares, Securities and other Alternative Investments (i.e. investments in land development).

The most essential rules and characteristics governing the procedure of Asset Allocation are the following:

Returns and level of assumed risk

The expected return and the investment risk contained in each investment class constitute the most important factor in specifying the total amount of investment per class. The main conclusion and absolute rule is the bidirectional relationship between the investment risk and the return; the higher are the expected returns the greater is usually the investment risk.

Investment Horizon

An absolutely important element in the correct Asset Allocation constitutes the detailed specification of the investment horizon.

The main concern of the Fund is to maximize the benefits that are expected to be provided to the Members when resigning from the Fund. The determination of the benefits to be provided to the Members mainly depends on the return of the portfolio resulting from the long -term investment strategy applied by the Fund.

Thus, the determination of the long term investment policy according to the Optimum Asset Allocation has great importance as based on such policy the returns are maximized in long term. The maximization of return is of great importance for the Provident Funds since based on their nature they are long term investors having a horizon exceeding the 10 years. In such cases even the minimum improvement made in the return of the investments affects significantly on a long term basis the final return and the benefits to be provided to the Members upon when resigning from the Fund. The actual long term returns per return class converge with the historical returns, but they differ in case that the investment horizon is not adequate.

The Optimum Asset Allocation

The Optimum Asset Allocation specifies the best combination of Shares, Securities, Immovable Property, Cash etc to form the portfolio so as to maximize the returns without taking any risk over the acceptable investment risk.

The saying “don’t put all your eggs in one basket” is very wise in the procedure of specifying the Optimum Asset Allocation and the consideration of the fact that the returns of investments differ per class and per time period. For example, based on historical data, when the Government Securities offer relatively law returns, then the Shares offer rather high returns. Of Course, this apply also vice versa. Thus, the combination of different investment classes contributes substantially to the reduction of the investment risk by utilizing these disproportional returns and at the same time through the dispersion and not excessive reliance on a specific investment class.

Exchange Risk

Given the fact that the Fund has the right to invest in International Markets, then the exchange risk arises which must be dealt with. All the investments abroad contain this element as they are executed mainly in foreign currency other than CYP £.

This point is very important since all of the Members of the Fund are Cypriot residents and they expect to receive their benefits in Cyprus Pounds. Any change in the value of the Fund resulting from the changes in the exchange rate of CYP £. with another exchange affects subsequently the value of such benefits.

The adoption of the Euro (“EUR”) and the subsequent conversion of CYP£ into the single European currency implies that the Assets and Liabilities of the Fund on a long term basis will be converted into Euro.

Therefore, in currency terms, the most significant factor to be taken into account is the impact that may have on the Assets of the Fund the adoption of the Euro and the possible benefits that may arise in favour of the Fund from the premature asset investment in such currency.