Investments
2024 Capital Market Assumptions
The 2024 edition of our 10-Year Capital Market Assumptions (CMAs) offers our projections for asset class returns, volatilities and correlations over the next decade. This yearly exercise helps in shaping the design of our investors’ long-term portfolios.
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Investments
2023 Year-End Fundraising Checklist
The approach of the end of the year means end-of-year tax planning, which for many includes finalizing annual charitable contributions. This presents an opportunity for nonprofits to engage donors and help them complete their gifts by December 31.
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August 2023
How the end of the “Zero Interest Rate Policy Era” and stress on the banking sector impact investors and planned giving.
Key Takeaways
• Yields on cash and fixed income instruments have increased dramatically in the past 12 months.
• Cash and cash equivalents in a portfolio are used to fund short-term liquidity needs like making periodic beneficiary distributions.
• For planned giving accounts, we do not hold more than 5% cash in most situations.
• Over the past 20 full calendar years (2003 – 2022), a balanced portfolio of 60% equities and 40% bonds outperformed cash over almost all intermediate and long-term time periods.
After 14 years of near zero interest rates, income yields on cash and fixed income instruments have increased dramatically in the past 12 months. Fueled by aggressive Fed interest rate hikes, the yield on cash and cash equivalents like U.S. Treasury Bills is over 5%. The persistence of inflation and a tight labor market is putting pressure on the Fed to continue its rate hikes into the latter half 2023.
At the same time, stresses in the banking sector due to some high-profile bank failures are forcing investors to assess the safety and liquidity of their cash holdings. Higher returns and the heightened awareness of risks associated with cash, will have profound effects on how investors manage the liquidity in their portfolios. For planned giving portfolios that often have annual distributions of more than 5%, it will be important to manage cash efficiently to ensure adequate liquidity for income beneficiaries and maximize long-term returns for remainder beneficiaries.
How Much Cash Should You Hold in a Typical Planned Giving Portfolio?
Cash and cash equivalents in a portfolio are used to fund short-term liquidity needs like making periodic beneficiary distributions. Typically, portfolios are managed to maximize return at a given level of risk over the life of the planned giving vehicle or account. To achieve this objective, the portfolio must be fully invested in assets like stocks and bonds that generate a rate of return higher than “risk-free” assets like cash. So, despite the attractive cash yields in today’s environment, we do not expect cash to outperform stocks and bonds in the long run. According to BNY Mellon’s 2023 Capital Market Assumptions, the expected 10-year nominal return on cash is 2.3%, while the expected return for U.S. equities is 6.5% and investment grade bonds is 4.1%. Based on these return expectations, BNY Mellon Wealth Management’s Investment Strategy Committee (ISC) does not recommend a strategic allocation to cash. For planned giving accounts, most portfolios have between 0.5% - 2% in cash at any given time.
Is There a Hidden Cost to Holding Cash, Even at Today’s Higher Yields?
Historically, “risk free” assets like cash and cash equivalents exhibit lower rates of return than stocks and bonds. Generally, holding excess cash is a drag on the portfolio that reduces the probability of capital appreciation and preserving purchasing power. While it is tempting to hold more cash with nominal short-term yields greater than 5%, real yields are still only slightly positive at best with core inflation at or near 5%.
A Balanced Portfolio Outperforms Cash (2003-2022)
Over the past 20 full calendar years (2003 – 2022), a balanced portfolio of 60% equities and 40% bonds outperformed cash over almost all intermediate and long-term time periods. In fact, for periods greater than five years, a balanced portfolio outperformed cash 100% of the time. For all rolling time periods analyzed, the annualized total return of the balanced portfolio was 6% - 7% higher than cash on average.
Cash can be an evergreen part of a comprehensive strategy, providing liquidity and serving as a source of funding for near-term liabilities.
Why Might You Hold Excess Cash in a Planned Giving Portfolio?
There are many reasons why it might be appropriate to hold an elevated cash position in a portfolio. For planned giving portfolios, the frequent and sometimes large distributions required are the most common reason to hold cash. In most cases, these elevated cash balances will be withdrawn within 30 days. There are legitimate reasons to hold elevated cash balances longer than 30 days. For example, one might hold enough cash to cover the first year’s beneficiary distributions for a new trust to avoid the realization of short-term capital gains, decide to dollar-cost average new gifts into the portfolio over a period of three to six months, or move to an all-cash allocation for an account with a term date certain within the next 12 months.
Whatever the reason, it is important to review cash levels frequently and understand the reason for long-term elevated cash balances.
How Are Cash Balances Invested in Planned Giving Portfolios at BNY Mellon Wealth Management?
Cash Reserve Account (CRA)* – Sweep vehicle for investment management accounts, interest bearing, rates reset weekly, no minimums, daily liquidity, FDIC Insurance up to $250k per depositor, per insured bank, in each account ownership category, remaining balances backed by collateral. More information on FDIC insurance is here.
Money Market Mutual Funds – Sweep vehicle for investment management accounts, daily liquidity, higher levels of income than bank deposits, $1.00 stable NAV with risk of loss, subject to advisory or fund management fees.
U.S. Treasury Bills – Discount note, interest payable at maturity, maturities up to 12 months, on the run T-bills trade at market yields, subject to interest rate risk and reinvestment risk, principal guaranteed by full faith and credit of the U.S. government, daily liquidity.
Certificates of Deposit (CDs) – Time deposit with fixed terms, guaranteed fixed interest rate until maturity, variable terms of 1 to 12 months, early withdrawal penalties, FDIC Insurance up to $250k per depositor, per insured bank, in each account ownership category.
Other Fixed Income – Short- to intermediate-maturity investment grade bonds, maturities up to 3 years, higher yields than U.S. T-Bills, subject to credit risk, interest rate risk and reinvestment risk, no guarantee of principal, daily liquidity.
Are My Assets Safe with BNY Mellon?
Every asset is naturally subject to losses or gains from an investment perspective. While BNY Mellon Wealth Management is very focused on protecting, preserving, and growing client assets over time, no investment approach can guarantee protection from inherent market risk. At BNY Mellon, we are committed to the safety of your assets. This includes securities and deposits held or managed through BNY Mellon Wealth Management and its banking entities. We advise clients to carefully consider where to hold their assets, as regulations and business practices differ between financial institutions.
Deposits in BNYM N.A. and BNY Mellon Trust of Delaware accounts, such as CDs, are eligible for FDIC insurance up to $250,000 per depositor and $500,000 for joint accounts. Furthermore, the regulatory nature of being classified as a Globally Systematically Important Bank (GSIB) requires BNY Mellon to maintain leverage and liquidity ratios in excess of banks with fewer than $250B in assets. Our company is consistently ranked among the top financial firms with strong external credit ratings. Additional information on our credit ratings can be found here.
Evaluate Your Cash Strategy
On a periodic basis, it’s prudent to evaluate liquidity needs within planned giving portfolios. Doing so can help ensure you have the right balance of being able to meet your short-term liquidity needs, while maximizing your portfolio’s long-term performance.
*Recommended cash vehicle for investment management accounts.
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