As an investment adviser for over 37 years, I found myself shaking my head and rolling my eyes as I read a recent editorial in the Independent dated Nov. 7, 2023, regarding the Recreation Centers of Sun City West reserve account, its investment policy, and its current investments.
The article is full of half-truths, skewed data, and showed a general lack of portfolio management skills and understanding.
Because the reserve account sustained losses in the last fiscal year and the first three months of the current fiscal year — the worst bear market in bonds in the past 50 years — the article implies the RCSCW investment policy was not followed because of its foremost objective of preservation of capital.
What is not stated is that the investment policy also requires there to be broad diversification by investing in multiple asset classes, with regards to liquidity, credit risk, interest rate risk, while seeking a rate of return to address capital needs, operating costs and inflation.
There is even a paragraph that specifies that funds shall be invested in a range of fixed income (bonds) and equities (stocks) with equities not to exceed 10% of total investments.
These guidelines were followed by the current money manager as well as the acknowledgment of that by the members of the Budget and Finance Committee.
In investment management practices, it is important to understand the difference between the volatility of an investment and the risk of losing the principal of an investment. The above-mentioned article would have you believe the RCSCW investment policy restricted investments that have the potential to go up or down in value, which is simply not true.
The goal of preserving capital would certainly restrict speculative investments or risky investments that could result in the permanent loss of capital, but there is nothing in the current investment portfolio that fits that risk category.
The article talks about a bond ladder, which is a type of bond management, but not without risk or volatility. To say that unrealized losses would not have occurred if a bond ladder had been employed is simply not true. To claim otherwise shows a lack of understanding of how every bond works in a rising interest rate market.
The fact that there have been realized losses of a relatively small amount to the size of the total portfolio also points to the fact the current managers are more than likely repositioning a small percent of the investments to asset classes they feel will come back quicker when the current interest rate and bond markets begin to recover (as has been the case since the beginning of November).
There is always room for improvement in how things are managed and handled by an entity as big as the RCSCW, and I would hope that through constructive dialogue and discussion we as a community can move forward in a positive way and improve.
It is a bit disconcerting to see the negative focus and spinning of the real facts by those who would have us burn things down and throw people out because of ego and the get even nature of today’s world and politics. I hope the voters of Sun City West can see through this and the current recall effort and vote in a way that reflects this understanding.