On Nov. 7, 2023, Sun City West’s investment adviser Captrust made a presentation to the community. Captrust officials stated the association’s investment of reserve account funds is currently $3 million underwater, but advised the association to stay the course. Officials have indicated that actual losses will not be sustained unless actual sales occur.
A review of Recreation Centers of Sun City West financial statements show sales have occurred in the reserve fund account. In the fiscal year ended June 30, 2023, and during the first several months of the fiscal year starting July 1, 2023, sales were made of the reserve funds invested. Captrust did not disclose that the association incurred recognized (real) losses of $416,004 in the fiscal year ended June 30, 2023, and recognized (real) losses of $257,070 in the first three months of the current fiscal year. The total losses to date are $673,074. These are actual losses from sales, not declines in value.
It should be noted that not a single individual on the Budget and Finance Committee discussed the actual losses sustained. Either they were not aware of such losses or were not amenable to discussing the fact that real losses had been incurred. The Budget and Finance Committee should have discussed upcoming capital expenditures, which may require the liquidation of a portion of the investment portfolio at a significant loss.
The sales of investments were most likely made as a result of needing funds to meet current capital expenditure obligations. Because there was not an investment program that makes investment proceeds available when the funds are needed, the sales were at a significant loss. At the Captrust presentation, a Sun City West resident suggested if the association used an approach to invest in bonds with varying maturity dates, funds will always be available when needed and losses of capital will never be sustained. This approach is called a bond ladder, which is commonly used when invested funds are needed at predicable future intervals. With a bond ladder, much of interest rate risk is eliminated.
The architects of the RCSCW investment policy placed a premium on avoiding risky investments by stating the foremost consideration of investments was the preservation of capital. In other words, investments should not be made that risked capital. Because investments that risked capital were made, real losses of $673,074 have been incurred, and the remainder of the portfolio is at least $3 million underwater.
Realized and/or unrealized losses would not have been incurred if a bond ladder was employed. Although the preservation of capital is paramount in the stated investment objectives, Captrust will never admit it violated RCSCW policy when it purchased instruments that risked capital. The members of the Budget and Finance Committee have likewise refused to acknowledge the policy restrictions on investments, and unanimously voted that Captrust’s investments conformed to RCSCW investment policy. If either body admitted otherwise, there could be serious ramifications.
I encourage the reader to take the objectives outlined in RCSCW investment policy, (Fi12), to a professional money manager, and ask the money manager if the investment options are restricted because of the stated objectives in the policy. I have shown the objectives of Fi12 to professional money managers, and the unanimous answer has been the investment options are restricted to investments that do not risk capital because of the stated position of preserving capital as the foremost objective.
