Sun City West board reviews reserve fund investment strategy, working group favors modest equity increase
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Summary
Budget & Finance working group presented modeling that suggests raising the reserve fund's equity allocation from 10% toward a 20—30% target range to improve long-term returns while keeping short-term liquidity in treasuries; board offered consensus direction and asked for a formal policy recommendation.
At a Feb. 14 Sun City West Governing Board workshop, the Budget & Finance working group presented an in-depth review of the association's reserve investment strategy and sought direction on proposed changes to investment policy.
The working group, led by Mickey Jacobs with members Rick Ruffai and Director Christine Novello (treasurer and BNF chair), displayed 20-year cash-flow models and CapTrust scenarios showing that raising the association's equity allocation above the current 10% could materially increase long-term reserve balances without a large rise in volatility. The association has about $30 million in its reserve fund and is in a capital-intensive 10-year period that covers most golf- and infrastructure-related projects.
Why it matters: the reserve fund finances repair, replacement and new capital projects across Sun City West's amenities. Small changes in long-term investment returns compound over decades and can affect whether future strategic projects require special assessments or outside funding.
The working group modeled the current 10% equity/90% fixed-income policy against alternate mixes (20%, 25% and 30% equity) using historical annual returns over the past 20 years. CapTrust's stress testing and a working-group model showed similar end-of-horizon results across conservative and modestly more equity-heavy mixes, with the 30% scenario projecting larger reserve growth (the model projected roughly $64M'$71M in reserve balances across scenarios at 20 years under their assumptions). The presenters stressed that most cash needs across the first 10 years are covered by annual inflows (asset preservation fees, an annual allocation from dues and investment income), so only about 15—20% of reserves need to be held in cash-like instruments for near-term spending.
—20We modeled both the ups and downs—not just averages,—20 Jacobs told the board. —20If you maintain your investment policy and don't panic and sell at the bottom, you're likely to end up in the same or a better place.—20
Presenters recommended several policy changes, including: - Establishing an equity target with an allowable range (rather than a fixed 10% ceiling) so managers and advisors need not rebalance after every small market move. - Explicitly matching investment duration to cash needs (e.g., keep cash for needs within five years in treasuries or money-market equivalents; use longer-duration and equity exposure for monies not needed for 10+ years). - Including a —20stay the course—20 provision to reduce the risk of market-timing decisions during downturns.
Director Tim Hurley and others raised concerns about retaining unedited recordings (addressed in another agenda item) and about the risk of changing targets only to have a future board reverse the change. The working group suggested linking any target to the annual or five-year financial plan review so future boards revisit the target deliberately rather than changing it ad hoc.
The group also reviewed the realized and unrealized valuation effects from 2022: the board heard that the material valuation decline then was driven by fixed-income markets (bond values fell as interest rates rose) and that, because equity historically recovers faster, a slightly higher equity allocation would likely have reduced the time to full recovery. "That 2022 valuation change was bond-related, not equity-related," Jacobs said; "equity recovered faster in the subsequent period."
Operational and implementation notes discussed by staff and CapTrust: - Any move to increase equity exposure would be phased in (presenters suggested a staggered implementation over roughly 12 months) to avoid forcing large realized sales at a single point in time and to provide flexibility in liquidity management. - CapTrust's reported fee for managing the portfolio (about $58,000 annually) would not rise simply because the equity percentage increased, the working group said the firm reported. - The committee recommended holding at least a five-year cash bucket in low-risk treasuries or equivalents to fund near-term capital projects without realizing losses.
Board direction and next steps: the governing board signaled consensus support for the working group to continue developing a formal policy recommendation (including target and range options) and to align that draft with the association's five-year planning timeline. Budget & Finance plans to finalize policy redlines and come back with a recommendation to the board no later than the June workshop, with earlier committee review expected in March and April.
—20This is not a crisis,—20 Novello summarized. —20It's an opportunity to improve how we manage a substantial community asset.—20
The working group will return a formal policy proposal and implementation plan for board consideration, including recommended target, range, rebalancing approach and an operational phasing plan.
