CapTrust: bonds pressured fourth quarter; working group urges wider equity range for reserve fund

Christine Novello, chairperson of the Rec Centers of Sun City West Budget and Finance Committee, opened the Feb. 4 meeting with a scheduled quarter-end review of the association’s reserve portfolio led by CapTrust.

CapTrust principal financial adviser Nathan Erickson said the primary driver of the negative fourth-quarter return was a sharp rise in interest rates that pushed the bond market down. “The bond market was down 3.1% in the fourth quarter,” Erickson said, adding that U.S. large‑cap stocks rose 25% for the year and fixed income was up 1.3% for 2024.

The working group that modeled alternative allocations — led by resident volunteer Miki with co‑lead Rick Rafai — recommended changing the association’s current 90% fixed‑income / 10% equity policy to a target and range that would permit more equities. “The working group believes that the current investment strategy is unnecessarily restrictive due to the big component of the Fund that is long term in nature,” Miki said, describing scenario models at 10%, 20%, 25% and 30% equity.

Why it matters: The reserve fund finances multi‑year capital projects and recurring replacements across Sun City West’s amenities. The working group and CapTrust both modeled 20‑year horizons and concluded that, because annual inflows cover most near‑term needs, the portfolio can tolerate a larger equity allocation to improve long‑term purchasing power and to better support strategic projects beyond routine repairs.

Key findings and numbers - CapTrust and the working group used historical year‑by‑year returns and Monte Carlo–style modelling of the same scenarios. CapTrust noted the late‑2024 rise in the 10‑year Treasury and the resulting mark‑to‑market losses in bonds. Erickson pointed to a September‑to‑December move in the 10‑year Treasury from roughly 3.81% to 4.58%. - Carol Romy of CapTrust said the reserve portfolio’s market value started the quarter at about $29.5 million and fell to about $28.7 million; for full‑year 2024 the portfolio produced “a net investment return of almost a million dollars.” - The portfolio is currently managed to the existing investment policy (90% fixed income / 10% equity). The working group modeled alternatives at 10%, 20%, 25% and 30% equity; all scenarios showed similar end‑of‑20‑year ranges, with CapTrust’s projections generally close to the working group’s. - Cash‑flow modeling showed higher capital needs in years 1–10 (chiefly golf course projects). The working group reported roughly $96.6 million in anticipated outflows in the first 10 years and about $81 million in years 11–20; annual inflows (asset preservation fees and annual allocations) were modeled to cover roughly 91% of near‑term spending before investment income. Under the baseline assumptions the working group estimated a shortfall of about $5.5 million in the first 10‑year period—manageable from a $30 million reserve fund when spread over multiple years. - Expense and risk statistics: the working group reported a low overall investment expense ratio (presented as 0.5%), and both groups found that moving from 10% to 30% equity increased expected return materially while producing only modest increases in projected standard deviation and maximum historical loss in the models.

Committee and community response Committee members praised CapTrust for plain‑language explanation of economic drivers and the modeling work. Several committee members said they value consistency and cautioned against frequent policy changes; CapTrust and the working group emphasized that a formal target with an allowable range reduces the need for constant rebalancing and helps the firm manage the portfolio prudently.

Quotes - Nathan Erickson (CapTrust): “When interest rates move up, the value of bonds goes down. And so that was the driver of the negative performance in the bond index.” - Miki (working group co‑lead): “We are positioned to meet our scheduled repairs and maintenance and replacements, but there isn't a lot of cushion if we have any unplanned … or strategic investments.” - Carol Romy (CapTrust): “For the year, 2024, still a net investment return of almost a million dollars on the portfolio.”

Next steps The working group will present its findings and a draft strategy recommendation to the governing board at the Feb. 14 workshop for feedback. Committee members asked that any final recommendation include implementation guardrails (short‑, medium‑ and long‑term liquidity buckets) and an education plan so future boards understand the policy rationale. No formal policy change was adopted at the Feb. 4 meeting.

Ending Committee Chair Christine Novello said the next steps are continued committee review and governing board feedback; the item will return for formal recommendation later in the spring budget cycle.