A Textbook Case of Optimizing Cash

Audio Description

The push-pull between higher yields and inflation has left fiduciaries befuddled when it comes to cash. Hear how one forward-leaning CFO navigated these tricky waters.


This transcript has been generated by an AI tool. Please excuse any typos.

00:00 - 00:59

These are tricky times indeed for financial decision makers at any type of institution. On the one hand, organizations can access more yield today in high quality fixed income and even in a money market account than we could have at the beginning of the year. On the other hand, however, cash and short fixed income are far, far, far from keeping pace with inflation today, and increasing interest rates are likely to contribute to a major economic slowdown ahead. So it's important to have a surgical and intentional approach to both sizing and allocating reserves today. But here's the thing. As fiduciaries, we need three things to swiftly and effectively act on those recommendations. You need clear and current policies, processes and players accountable for implementation. So thank goodness we have an experienced association, CFO and an investment advisor here today, so they can share some best practices and lessons learned along the way. On navigating across the spectrum of liquidity needs and time horizon.

01:08 - 01:15

Hi everyone. Welcome to Inspired Investing. I am your host, Clare Golla, head of Foundation and Institutional Advisory at Bernstein.

01:16 - 01:50

This podcast is where we strive to connect and share insights with listeners like you who are engaged with nonprofits, philanthropy and the broader social sector. I am excited to have a dynamic duo here today. Christine Souder is CFO of the Associated General Contractors of America or AGC and the AGC Foundation, and Eric Steinmuller is a principal and senior investment adviser with Bernstein managing several tax exempt relationships and thankfully for me also serves as a member of our Foundation and Institutional Advisory Board nationally. Thank you both so much for being here.

01:51 - 01:53

It was a pleasure being here. Thanks for offering the opportunity.

01:54 - 01:58

Thanks. Both Clare and Christine made it great.

01:58 - 02:08

All right. Let's dig in. So, Christine, I'm going to start with you. So let's just frame this. Can you share a little bit about AGC and the foundation in your role there?

02:08 - 02:41

Sure. They Associate General Contractors of America or AGC is a national trade association for the construction industry. We represent 27,000 companies, plus over 10,000 service providers and suppliers to general contractors all through a national network of 89 chapters. We operate in a partnership with the chapters. The Association provides a full range of services satisfying the needs and the concerns of our members, thereby improving the quality of construction and protecting the public interest.

02:42 - 03:11

AGC provides education, training, data, resource, library publications and most importantly, advocacy on all things related to construction industry. As the CFO, I manage all financial aspects for both AGC and our affiliated fiber. 1c3 Foundation. The AGC Education Research Foundation provides scholarships and research grants to qualifying students and universities interested in construction and civil engineering.

03:11 - 03:29

Thanks, Christine. So let's start with this. You've been managing short, intermediate and long horizon pools of assets for both of the entities, AGC and the Foundation for quite some time. So could you give us a little bit of the history on how these funds came to AGC originally and just the overall investment strategy?

03:30 - 03:52

Sure. So a little bit about the history of our reserve funds. We sold our headquarters building back in 1999, which led to a large cash infusion, a reserve bonds, or mainly a rainy day fund which provide a stream of revenue to offset our annual operations tied to renting space for the national headquarters. Strategic Advocacy and Capital Investment Initiatives.

03:52 - 03:56

Got it. And what was the initial thinking behind establishing the reserve fund?

03:57 - 04:13

Originally, the purpose of the Reserve Fund was to invest the proceeds from the sale of the building, such as the earnings would help us to pay for the reoccurring space needs and to pay for all the nonrecurring spacings needs. The proceeds would be invested to purchase a new headquarter building someday.

04:14 - 04:16

And you did end up tapping the reserve, right?

04:17 - 04:33

Three years later, we used a portion reserve and purchased the legislative headquarters on Capitol Hill for a lobbying team. Over time, the reserve funds grew from the Investment Gains and Operations Surplus Association's needs changed over time as well.

04:33 - 04:35

Tell us a little bit more about that.

04:35 - 04:57

Sure thing. Earlier on, we were considering another real estate headquarter purchase, but inside the association and the construction industry had needs that could be met by reallocating a portion of our current reserve funds for advocacy and another portion for maintenance of our I.T infrastructure in the maintenance of our DC legislative headquarters.

04:58 - 05:06

So now you were in this enviable position of having a surplus in your reserves, and so you could start to think about other needs of the association. So you pivoted?

05:07 - 05:50

Absolutely. Three separate board designated funds were established 65% or approximately $14 million at the time of the reserves would continue to be available only in the event of an extraordinary downturn in the economy. We call this our AGC Rainy Day Fund. 24% of the AGC reserves for $5 million at the time would be available to support our advocacy activities in the remaining 9% to May at the time would be available to support investments in our AGC educational programs, the future investments in technology needs and our capital improvements for AGC legislative headquarters in DC.

05:50 - 06:09

So I just want to jump in for a second here and really emphasize this. It is so important to root the size and the allocation of different asset pools in both the prospective market environment as well as the organization's specific needs and outlook. So Christine, how did this influence how you thought about investing your reserves?

06:09 - 07:01

Our overall investment strategy is a long term budget slash revenue objective, along with anticipated annual cash flow. Our investment goals include liquidity requirements, rate of return and transfers to operations with prudent level of risk and asset allocations across asset classes. We believe in separating our investments into buckets based on time horizons, liquidity needs with the asset allocation, based on the committee's preferences for risk and return optimization, along with benchmark and fee sensitivity. Cash flow annually is seasonal for us, with 50% of our revenue being received in the first quarter of the year, from our charter fees, from our chapter membership in the large annual conference. Therefore, we can invest some of our money and still use it later on in the year.

07:02 - 07:06

That's great. No, that's a very comprehensive answer. Thank you so much.

07:06 - 07:51

And so what you're describing here, Christine, is like, I think a number of decisions needed to be made upon the sale of a building originally. We see that a lot, I think, across the country. But it's been a continuous process as the association itself has evolved. And you've actually even mentioned something that we've been seeing across organizations, which is a shift from brick and mortar needs right. To maybe just reserves to keep the lights on, right. Building reserves, but then also I.T. infrastructure. Right. So moving to more subscription types of of expenses as well. So can you share a little bit about the players involved and your decision making process for the investments at AGC, who is involved in sizing and allocating this pool sort of along the way?

07:52 - 08:18

Sure. So we have an investment committee which is made up of between six and 15 members, which mainly consist of our current treasurer, the two past treasurers on our board. And we also have the current investment chair from our AGC Foundation. The Chair of the investment committee is supported by the EDC Board President. The remaining members consist of past officers. So within our committee sorry.

08:18 - 08:22

I was just going to ask you that. What is the role of your investment committee?

08:23 - 08:56

The committee reviews the needs of the association and recommends investment policies that are adopted by the board and they implement with the oversight of the investment committee and ultimately the AGC board of directors. The committee evaluates the goals of the funds, the investment mix, the risk tolerance and the time horizon in the selection of the investment advisor, the fund. We go through an RFP process every five years for an investment advisor. We've been working with Erik as our best advisor since 2011. It's been a great partner to work with.

08:57 - 09:22

Great. Well, thank you so much. I just want to highlight another key takeaway here. It is vital to have a clear process approved by the board, led by a key executive, likely the CFO, and executed in partnership with the Investment Committee to ensure that these recommendations are made and that they are actually swiftly implemented and documented. So kudos to you, Christine, for having that structure in place.

09:22 - 10:09

And so, Erik, this is a great Segway, fantastic advisor, incredible colleague. Thank you so much for being here. It's fun to have you here. As I've mentioned earlier, you essentially have gone through with AGC over the years what we've actually endeavored to accomplish by building out a reserves analysis tool this year, because we get this question so often, particularly in this environment right around how do we even think about what's short, what's intermediate, how do we allocate? There's those assets. So could you maybe walk us through the process you went through from your perspective with AGC leadership just in order to create these pools originally and the allocation? So maybe like some lessons learned along the way and how you incorporate that into your advice today?

10:10 - 10:27

Sure, Claire. First, Christine, the AGC staff and the investment committees are great to work with and they're a very sophisticated group, all having leadership positions in their own construction companies and understanding short versus long term. Any needs in that context.

10:27 - 10:36

So you bring up a good point here. Do you think that the background actually helps explain why they were such early adopters of this kind of strategic approach to cash?

10:36 - 10:53

Yes, absolutely. By the very nature of construction companies, they're experts at project based spending and financing. And so to understand and to regularly optimize these investment buckets came very naturally.

10:53 - 10:54

Well, Erik, and.

10:54 - 11:05

Something that seems to come very naturally to you and your team is this communication and education right around the rationale for your overall investment program. Can you talk a little bit about how you did that with ACG?

11:06 - 11:39

We just discussed different time horizons and liquidity needs for each bucket, if you will. And it was and is an iterative process. To summarize the buckets at a very high level. Based on what Christine reviewed previously, but with investment time horizons, both AGC and the foundation have a longer term reserve. As Christine said, they can take small percentages from these funds for operating or scholarships, but for the rest of the corpus it was there and is there to grow.

11:40 - 12:26

AGC split out two separate funds for advocacy and capital improvements. And these funds with a 3 to 5 year time horizon are more balanced than the growth oriented longer term reserves and have 2 to 3 days of liquidity. AGC and the foundation each has an operating reserve from money they know they'll spend within the next 12 months or for which state of day principal protection is more important. Once all committee and staff understood the different investment buckets, their discussion became sizing each bucket. For instance, does it look like we need more funds for advocacy over the next six months? And if yes, from which bucket should we take those funds?

12:27 - 12:32

So did you find that using this approach changed how the committee viewed performance?

12:32 - 13:21

Yes, absolutely. The reviewing performance became much more focused. The longer term reserves had their own benchmarks, and the committee members were ready for significant growth in 2021 and more downside risk in 2022. That said, because these funds were growth oriented, the cushion these accounts built up during big years in 2017, 2019, 2020 and 2021st May 2022. Easier to stomach. The separate funds have their own benchmarks and are designed as the as designed are very liquid and have fallen less during the difficult markets in 2022. And the operating funds fluctuate much less than the other funds and are more readily available.

13:22 - 13:23

That's great. Thank you, Eric.

13:24 - 14:20

It's interesting how you describe each year the committee goes through thinking about will advocacy be more important? What what's going on in our organization, at our institution in terms of sizing and allocating? So you mentioned there's short reserves. Then there's about a 3 to 5 year sort of time horizon and then the long horizon. I just want to make a note here that that that 3 to 5 year time horizon, some organizations may consider their intermediate 1 to 3 years or like or 2 to 4 years. Just to highlight, it really can be customized to meet the institution's leads, right. And that's critical. And that's something that I think it's important communication between an advisor and the committee. So on that note, in terms of communication, Eric, how are you communicating or working with Christine in the committee on.

14:20 - 14:20


14:20 - 14:24

Those allocation changes as the environment changes?

14:24 - 14:57

The communication is the key. Both committees are very open to discussion, and Christine's agenda and previous meeting minutes always set the stage. But the main challenge of working with committees is they don't meet every day. And since most are running their own organization, the bucket strategy makes it easier for them to prepare for the next quarterly meeting. Clearly, the strong relationship with Christine is a critical one, as committee members voice their goals and concerns with her so that we can address more proactively in our quarterly meetings.

14:57 - 15:29

Any membership association board is typically made up of folks in the industry, so there can be in some some inherent bias there with regards to certain aspects of the economy and investing, because we do not believe we can time the market focusing the discussions on current and projected market environments within the context of the different buckets. Time horizon makes it easier to frame how the more conservative accounts could be affected versus whether the long term reserves have time to bounce back into growth.

15:30 - 15:57

So of course, an updated investment policy statement is critical. It not only sets the stage and the parameters for the portfolios and provides the structure for quarterly meetings and the committee. But it also provides another benefit, and that is when new investment committee members come on the committee, they they see clearly the structure and how decisions have been made in the past to more quickly find their voice and contribute.

15:57 - 16:21

I love that. I think a well constructed investment policy that's rooted in today's market environment looking ahead and also based in the institutions realities. Right. What's important today and looking forward, it can be used as a really effective tool for onboarding new committee members so that everyone's on the same page from the beginning. So thank you for walking through that.

16:21 - 16:40

So, Christine, I'm going to turn back to you. So speaking of today and looking ahead, you've mentioned that for a variety of reasons. You're actually at AGC holding a bit more cash today than typical. Could you share a bit about what you know, what happened? What were the reasons that you ended up with a little more cash than usual and what your plans are on that?

16:40 - 17:21

Sure, Claire. So over the years, we've built our reserve bonds to be more than one year of gross revenue. That was our original goal, and we reached that. And then beyond that, the last couple of years, especially 2019, 2020 and 2021, we've benefited from a large investment gains. Along with this last year, we earned the employee retention tax credit and have an operating surplus. Therefore, we currently have a larger than usual operating reserve balance in the first quarter of every year. Like I mentioned earlier, we typically have more cash on hand as our revenue is seasonal. Therefore, we'll be working with Eric very closely, especially with the interest rates moving.

17:22 - 17:47

Thanks, Christine. You bring up a great point in terms of interest rates moving. We've adjusted our four sort of starting points in terms of asset allocation for clients just from cash or, you know, the very short reserves all the way to different types of intermediate portfolios. And I mean, the fact is the glass half full perspective is that with an increase in interest rates, we can potentially earn more on sort of lower risk, lower volatility types of portfolios.

17:48 - 18:40

But again, going back to the conversation we've had today, the onus is on the decision makers at the organization and the advisor to actually have a policy and a process in place to make sure that those changes are made. I can't tell you how often we see an advisor, just. Just an allocation recommendation or a strategic conversation with key decision makers. But it doesn't necessarily make it onto the agenda of the next committee meeting or there are a number of questions and a decision is pushed to the next meeting again and again. There's so many reasons that good advice doesn't necessarily get implemented or that organisations end up sitting on cash that isn't keeping pace with inflation. So what we've discussed today in terms of shared accountability between the advisor, the CFO and the committee is critical in actually making and implementing decisions, especially important in this environment where excess cash is so rapidly losing purchasing power.

18:40 - 18:48

So Christine and Eric, we have covered quite a bit here together today. Any final thoughts for our listeners, either one.

18:49 - 19:23

Sure. So I just have a couple key things for people. And I think, you know, your cash flow and your reserve funds are very important to any business and you really need to make sure you know that your cash needs and your cash flow needs and to make sure that you review that regularly. And no amount of money is too small to get started with investing or setting up a reserve fund. You can start today and set your goals, set your short term, medium goals and your long term goals of how you're going to build your fund. And I highly recommend working with an investment advisor along the way as we receive many great benefits.

19:24 - 19:38

Yes, thanks, Claire and Christine. Yes. Organisations knowing their spending needs and amounts and working closely with Christine and her great committees enables a higher chance of meeting each of the account's investment goals.

19:39 - 20:23

Great. Well-said. Thank you both so much for joining me today. Just to reiterate those three key takeaways, the first is policy updating the apps annually, reflecting changing market conditions and the organization's changing needs. The second is process communicating and educating regularly on the rationale for the overall investment program. With that approved process for decision making. And then the third is the Players and Active Investment Committee partnering with the investment adviser and a key executive responsible for driving improved decisions into action. Thank you all for listening. If you would like to learn more on Bernstein Foundation and Institutional Advisory Services, please see the link in this episode's description.

20:23 - 20:44

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