Minco Ltd, a large mining company, provides a superannuation fund for its employ
ID: 2818835 • Letter: M
Question
Minco Ltd, a large mining company, provides a superannuation fund for its employees. The fund’s manager says: ‘We know the mining industry well, so we feel comfortable investing most of the fund in a portfolio of mining company shares’. Advise Minco’s employees on whether to endorse the fund’s investment policy. Minco’s employees should not endorse the fund’s investment policy because it involves the failure to diversify. The wealth of the fund’s members is already dependent on the prosperity of the mining industry, in that they are employees of a mining company. If their superannuation fund also invests heavily in mining company shares, many members will have most of their wealth “invested” in one industry. Therefore, their risk can be reduced by investing in a wider range of industries
Explanation / Answer
Minco’s employees should not endorse the fund’s investment policy because it involves the failure to diversify. The wealth of the fund’s members is already dependent on the prosperity of the mining industry, in that they are employees of a mining company. If their superannuation fund also invests heavily in mining company shares, many members will have most of their wealth ‘invested’ in one industry. Therefore, their risk can be reduced by investing in a wider range of industries.