Managing Condo Reserves

Condo reserve funds are there for when you need them. Whether it’s a hailstorm, a flood or a new exterior, your funds need to be secure and available. It’s been the norm for decades for most reserve funds to be invested in GIC’s or other cashable securities. This seems like common sense and a low-risk way to approach managing condo reserves, however with the rise of underfunded, we think there is a better way to approach generating an acceptable return while maintaining an acceptable risk profile. The main tool we use to generate a 3.0%-5.0% return for our condo clients is corporate debt. There are a variety of different types of corporate debt, which we have extensive experience dealing with. These debt instruments are “investment grade” meaning we only invest in high quality companies that have little risk of default (not being able to pay interest or repay principal). These companies include real estate companies, Schedule 1 banks and infrastructure companies.

How we mitigate risk:

• We keep the duration fairly short, meaning we don’t buy bonds that have a maturity date that is too far away. We like to have bonds maturing anywhere from 2-7 years away.
• Coupons need to be attractive. Depending on the maturity most of the attractive bonds we find have coupons of at least 3.5%.
• We buy bonds that have good liquidity. Just because the maturity date is far away, doesn’t mean we cannot sell them for a good price if you need the cash for a project. Most of the issues we invest in are deal sizes north of $250M.

With spreads narrowing over the past 2 years, we continue to favor shorter maturity bonds and GICs. We have had several rate cuts in the past 6 months, and bonds continue selling off suggesting to us that we are maybe at the limits of fiscal stimulus. Having cash rolling over in the short term is beneficial going forward in case rates start to move to the upside. We view the current bond market as “expensive” and want to be nimble when spreads start to widen.

https://www.morningstar.ca/ca/news/212664/lrcns-set-to-overtake-prefs.aspx

The conversation about how to generate a real return needs to happen now. With our extensive experience in the fixed income market and access to the debt instruments themselves, we have been able to generate very good risk adjusted returns for our condo reserve clients. Our clients are in better shape now and for the future to ensure their condo reserve fund is viable to meet their needs.