RES04 - Investing for Reserve Funds
Types of Investments Permitted to be Held by a Reserve Fund
Astute readers will say – hey, owners can either fund the reserve fund – or the reserve fund can start paying it’s own way through more lucrative investments. Why not try and get a high rate of return on our money in the bank? Provincial acts often kibosh these ideas – with good reason I might add. For instance in BC what the Reserve Fund (or Depreciation Report in BC) can be invested in is strictly defined in section 6.11 of the BC Act. Put simply - Bonds, T-Bills, and lots of other safe boring investments. Much like your retirement fund, you need the money to be there when you need it, or else you’re in trouble. I recently heard of a story where a resident wanted the condo corporation to invest the reserve fund by purchasing available units within their building and turn them into income producing properties. Aside from being prohibited from doing so in certain provinces, this is a bad idea as it violates several of the Commandments around Reserve Fund Investing 1) Thou shalt have little to zero chance of losing money · while there may be a long term basis of investing in real estate, there’s certainly the chance the market tanks for the short term. 2) Thou shalt have predictable growth rates · Closely related to commandment 1). As you’ve learned from the reading the Funding Schedule – you need certainty around how much will be in your account and in what year. Trying to “ride the investment cycles” and time the perfect time to cash in is completely incompatible with this. · Also, when Reserve Fund Report preparers are working on the Funding schedule, it’s pretty difficult to plan and forecast around investments that are +15% in yr 1, +25% in yr 2, -30% in yr 3, -18% in yr 4, etc etc. 3) Thou shalt have investment that can be turned to cash quickly (liquid investments) · Any one that’s tried to sell a property in a down market at a good price will tell you it can take months or even years to move a property at price you want. · In a down market, something like a condo may not sell under any circumstances… Which by Murphy’s law will be exactly when the Reserve Fund calls for a major expenditure. So with all that in mind – that pretty much leaves you with the less than sexy investments like GIC’s, Tbills, and High Interest Savings Accounts. Bottom line, talk to a licensed investment professional. Armed with your funding schedule they can build you an investment strategy that will support your cash flow needs with respect to amount and timing. Multiple investments may be used to reflect the short term /long term requirements of the Funding Schedule. Just don’t let them buy anything that doesn’t meet the above three Commandments…. What about ETF Funds? Note that BC specifically allows for investments in Exchange Traded Funds (ETF’s) of Corporate Bonds. I always advise Boards to talk through their investment strategy with their investment advisors but personally I do not like it when Boards put reserve fund money into these type of ETF’s that are sensitive to interest rate movements. People have the false impression that Bond funds are rock solid and do not decline – hardly the truth. Put simply, if the prime lending rate goes up, typically fixed income products go down in value, which in an increasing interest rate environment (like in 2013-14) can lead to investment losses in what is supposedly a “low risk” investment. Here’s a great example of a widely held Canadian Bond ETF that meets all of the BC Act’s requirements around investments – iShares’s 1-5 yr Canadian Corporate Bond. 
You can see it still drops from $21.00 to $19.50, about a 7% drop. Nothing less than a sparkling “A” rated bonds here folks. Cause of the drop? The fact that interest rates were set to rise as the economy is thought to be recovering. So much for the rock solid world of bonds….
High Interest Savings Accounts So what do I like in the world of investments for Reserve Funds? Personally I quite like the new High Interest Savings accounts. Returning just as much as GIC’s if not more, they have the added advantage of being pure cash, withdrawable at any time. They are pretty much risk free as long as the underlying institution doesn’t go under. Hence why I would recommending buying anything from too small and obscure, despite the higher rates they may offer. Whatever you do, ensure the institution is CDIC insured, which will help ensure you’re covered up to $100,000 if the institution goes under (hey, don’t laugh – the sky sure looked like it was falling in 2008!). Consider having multiple accounts if you have more than $100,000 in your Reserve Fund Accounts held in High Interest Savings Accounts. As in your personal lives, I recommend your Board work closely with a trusted investment advisor that will walk through your unique investment objectives and circumstances. ~CondoSensei |
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