Non-Profit Investment Report

IN THIS ISSUE:

• Market Commentary
• Q2 2011 Asset Class Returns
• Additional Market Indicators
• Learn how surplus cash can work harder for you
• Guidelines for rebalancing your portfolio

Attention non-profit CEOs and CFOs:

This newsletter contains timely information for the non-profit community.  The prudent management of cash, reserve funds, and other investment pools is especially challenging in times like these when interest rates are very low and investment markets behave erratically.

Market Commentary – The second quarter confirmed that the investing community is still skittish about how the health of the economy will impact the performance of their portfolios.  

Sovereign debt issues created headlines and impacted both the international and domestic markets and will likely do so for the foreseeable future. For example:

• State governments (Minnesota is a good example) are not able to afford what they have promised to pay, forcing their elected leaders to consider deep budget cuts in all services.  Many of these cuts will place additional burdens on non-profits budgets and programs.
• The US Government is facing enormous challenges with the unfunded liabilities of Medicare and Social Security, the ever growing national debt, and a tax code in immediate need of revision.  Non-profits will undoubtedly see lower federal support in the coming years.
• Foreign governments are crafting severe austerity measures that roil their citizens but are essential for their long-term fiscal health and stability.  Therefore, international fixed-income and equity investments must be selected with care.

Other market indicators point to an economic recovery that is uneven in many ways, yet has the fundamental ingredients in place to be sustainable for several years.   For example:

• The economy is growing, albeit slower than anyone would like;
• Corporate profits are strong;
• Inflation is very much under control;
•  Interest rates are low and will still be quite affordable when they do start to rise;
• Employment still needs to grow more robustly, but high corporate profits and low interest rates will support new hiring in the coming months.

Despite how the world situation feels to many people, and everyone’s inability to predict the future, the current economic realities may favor those who choose to invest now rather than wait for more good news.

Here are the 2011 second quarter returns of typical benchmarks for selected asset classes.  A diversified portfolio may include some investments in many (or all) of these asset classes.  The table is sorted by percent change during the second quarter.

Here are the 2011 second quarter returns of typical benchmarks for selected asset classes.  A diversified portfolio may include some investments in many (or all) of these asset classes.  The table is sorted by percent change during the second quarter.

• Asset Class Returns in this table are represented by Benchmark performance numbers derived from Thomson Financial, Investment View software research tool.  Organizations cannot invest directly in an index.  Index returns do not include investment advisory fees or trading expenses.  An investment benchmark is a standard against which the performance of an individual security or group of securities is measured.  For example, the average annual performance of a class of securities over time is a benchmark against which the current performance of members of that class and the class itself can be measured. 
• Actual portfolios should be constructed based upon an individual or entities specific financial resources, investment goals, risk tolerances, investing time horizons, tax situation, and other relevant factors.  Not all recommendations will be suitable for all investors.  Individual allocations and performance will vary.
•  Performance results shown do not include a deduction for investment management fees or expenses.  If management fees and expenses were included, the returns would likely be reduced by one percentage point or more for the annualized management fee, and there would also be additional trading commissions and expenses.
• Past performance is not a guarantee of future results.  There is no guarantee that historical returns will be repeated, achieved, or met in the future.  There is no guarantee that annual returns will be achieved or met in any year, especially during times of high market volatility.

Interest rates, energy prices, unemployment rates, and major US market performance are fundamental indicators impacting the global economy.

Learn how surplus cash can work harder for you

Non-profits and other institutional investors are constantly searching for ways to manage their current cash balances in today’s low interest rate environment.  Overall, goals include a strong desire to preserve principal, generate income and maintain the purchasing power of these important funds.

Many are concerned that investing in the stock market is too volatile and as a result maintain a conservative investment policy.  Others are anticipating the need to use cash reserves to supplement operating revenue and want to maintain flexibility and liquidity.  The traditionally safe government bond market offers miniscule returns and the US Government credit rating may be in jeopardy.

Looking beyond traditional money market accounts, CDs, and US Government securities, there are many additional fixed income asset classes that may be considered.  A diversified portfolio may include ultra-short term, short-term, and intermediate-term bond funds.  Those with a bit longer time horizon and tolerance for risk might also consider an allocation to multi-sector bond funds and foreign bonds.

This type of approach can provide near-term liquidity while at the same time allocating some of the assets to higher yielding holdings.  The result is an overall rate of return well above current bank money market accounts.

Guidelines for rebalancing your portfolio

Your Investment Policy Statement may already have established the target percentage allocations to several different asset classes as part of your overall diversified investment program.

As you can see by the Asset Class Returns table, some asset classes have done very well year-to-date and others have not performed at the same level.  This is a normal situation and one of the key reasons that a diversified portfolio is an appropriate strategy for many investors.  The composite portfolio benefits by having an allocation to these higher-performing asset classes without having to “guess” which ones will be best at any given time.

The variable performance means that some asset classes will have achieved gains and be above the original target allocation and some may be below the original target allocation.  A variation of plus or minus five percent from the target is certainly within normal ranges in most cases.  Any asset class that is more than five percent above or below its original target is likely a candidate for rebalancing.

The rebalancing process should also be established in the IPS.  Generally, gains in one asset class are used to purchase additional shares of the asset classes that have not performed as well.  In this way, the organization captures good performance (sells high) and increases holdings of lower performers (buys low). 

Over time, the performance of any asset class is unpredictable.  Using this method will ensure that your portfolio changes are based upon a well-conceived process and not subject to hasty decisions or the latest investment news.

RPJ Investment Advisory Services

If you are considering using the services of an investment advisor to assist in the preparation and/or review of your cash management and/or investment policy statement or to assist with the prudent management of your funds, we would consider it a privilege to have the opportunity to serve you.

For more information about our firm and our services please visit our website or give us a call at 703-821-6655.