INVESTING RESERVE FUNDS

"By actively managing the money rather than placing it in several securities and leaving it there," advises Tim Ghriskey, chief investment officer at Solaris Asset Management, "you can do better than [with such common financial instruments as] money market [accounts] or certificates of deposit."

The first step, says Michael Kelley, a financial advisor and former treasurer of a Manhattan co-op, is to vote on an "an investment-policy statement," which clarifies your goals and policies. Take into consideration that if the return is too small, even a little inflation can erode the value of your accumulated cash if there's a sudden rise in interest rates after you're locked into a small return. Betting on the stock market can post the highest returns of any asset class, but also carries the most risk — and given that most co-ops' objective is keeping principal intact, that's not advisable.

Post-policy Plans

After creating a policy, select a investment advisor. While some co-ops and condos have accountants, money managers and financial specialists on their boards, others may need to outsource. Some boards even prefer getting outside advice, since that can help prevent conflict of interest and/or bad judgment by shareholders.

Ghriskey says you should seek an institutional-size consultant who "will direct you to an investment manager and then monitor the manager. The manager will then select an allocation of cash, bonds and equities."

Kelley and Ghriskey both suggest low-risk securities, known as fixed income, that pay a specific interest rate or yield — typically, bonds or money-market accounts. How can you expect to do with such investments? Since 1925, inflation has run at about three percent a year, Kelley says, with 90-day treasury bills having returned 3.7 annual percent and long-term government bonds 5.4 percent. This means a fixed-income portfolio has averaged 4.5 percent — 1.5 percent over the inflation rate. While that pales next to the 10.4 to 12.7 percent that stocks and equities returned in that time, fixed income is safer, by being less prone to spikes and fluctuations.
How much do financial advisors cost? Ghriskey's firm, for instance, charges 1.25 percent of the assets per year for investments of one to five million dollars in commingled accounts; one percent for a $5 million account held separately; and one percent, scaling down, for investments above $10 million.

The Windsor Family of Funds

Larry Kinitsky, president of the 1,850-family Windsor Park Owners Corp. in Bayside, Queens, describes his co-op's reserve as "several million dollars." It began seriously investing three years ago after having amassed large funds in part through selling off non-core assets such as wireless-antenna rights.

Taking advice from Shearson — one of two outside advisors recommended by managing agent Akam Associates, and chosen after a board interview process — Windsor Park invests only in accounts insured by the FDIC.
"We're on a program of 'laddering' CDs," Kinitsky says, explaining, "Though they may be with different banks, the maturities are staggered from three to 24 months. If one comes due and we don't need the cash, we roll it back in. But we always have some money coming due every three months." This approach provides liquidity, says Kinitsky, who adds that the portfolio yields a little over five percent annually.

Allocation, Allocation, Allocation

You also need to decide how cash should be invested and how much held readily available. Some co-ops / condos may have reserve requirements written into their bylaws; others may just want to keep about six months' worth of operating expenses on hand.

"The strategy is based on when the money will be needed," says Dan Wurtzel, chief operating officer at Cooper Square Realty, which oversees 150 buildings. "How liquid does [the reserve] need to be? Are there capital projects coming up?" Recommending a mix of high-interest money-market investments and CDs, Wurtzel recommends the "laddered" approach Kinitsky describes. "The board has a fiduciary duty to minimize the risk," Wurtzel says.

Even if your co-op is not among the fortunate few with a couple of million to spare, it can still be a good idea to vote an investment policy into place to maximize the return on the funds you do have.

Georges Mosse, president at the 160 Columbia Heights co-op in Brooklyn Heights, says his building's reserve is not large but that the board still invests, through the co-op's bank, in money market accounts and government treasury bills with a maximum maturity of 30 days. Keeping an eye on the future, he already knows what the next phase will be. "As we build funds, it will be a question of investing for six months to a year."

Adapted from Habitat May 2008 . For the complete article and more, join our Archive >>