Investing for NFP’s in Uncertain Times

This is the third instalment of a regular series of articles by the Commonwealth Bank, who will be using their financial experts to provide news, insight and expert advice for Not for Profit organisations.

Is there a magic wand to solve a Not for Profit's investment conundrum?

In times of increased volatility it is easy to focus on the negatives faced by investors, uncertainty in US Economic Growth, Sovereign debt issues in Europe and a patchy domestic economy with Australian Equities up and down like a yo yo. Where do they turn?

According to David Tagg, Head of Wholesale Investments at the Commonwealth Bank, many NFP’s have focused on investing in cash and term deposits, and with interest rates available for terms over 90 days approaching or exceeding 6%, thinking how could they lose?

Tagg says NFP’s might think that investing in term deposits for all their funds would have delivered a far superior return than anything else since the commencement of the Global Financial Crisis. With 5 year term deposits secured in 2008 offering 8%, they couldn’t do better right?

Tagg asks what if they were told that several prominent Fixed Income Funds had produced returns in excess of 10% during this period?

He says when a NFP uses term deposits, liquidity management becomes key. For example, to exit a term deposit early investors will usually suffer a break cost, this cost can be material. In contrast with Bond Investments an exit before maturity can deliver a discount or a premium, depending upon current yields.

He says there is 100 years of investment market history that support the long term average rates to be achieved by different investment classes, and current Term Deposit rates are likely to reduce as funding pressures on banks ease, and credit markets return to normal.

Tagg advises that NFPs should fund their business like any business. They should focus short term income needs on cash and term deposits, and a more diversified portfolio for funds with an investment time frame of 3 years and beyond. Ultimately greater than 80% of their return outcomes will be driven by getting their strategy right.

Rather than focusing on a single investment style, or trying to time the market, David Tagg recommends focusing on achieving a diversified portfolio that invests in a range of asset classes matched with liquidity requirements. This will no doubt include Term Deposits, but should also contemplate other income and growth investments including domestic and overseas equities and fixed income and property / infrastructure.

This will deliver NFP’s a reliable return over a full market cycle.

Keep up-to-date with all the latest NFP Finance News from the Commonwealth Bank at probonoaustralia.com.au/news/commonwealthfinance

Disclaimer: Important Disclosures and analyst certifications regarding subject companies are in the Disclosure and Disclaimer Appendix of this document and at www.research.commbank.com.au. This report is published, approved and distributed by Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945.