Making Your Cash Work Harder

Not-for-profit (NFP) organisations typically maintain conservative investment profiles. In general, this is a sensible approach given the fiduciary obligations of boards and an understandable focus on avoiding investment losses.

It’s important to understand, however, that being too conservative can be counterproductive and lead to outcomes that are not in the best interests of the organisation. Being too heavily weighted to cash, for example, can erode the value of the portfolio over time as it fails to keep pace with inflation. Inflation has been a particular issue for many NFPs recently. With costs rising, it’s important to ensure that investment income is going to keep pace. One way to do that is to take advantage of rising interest rates that typically coincide with rising inflation, which is why now is the right time to review cash and fixed income investments.

In addition, there are new types of fixed income assets that are specifically designed to fund environmentally and socially responsible projects. NFP organisations may find these particularly appealing as they deliver a dual outcome – positive returns and positive impact.

In this article, we examine a range of low risk assets and the role they can play in a well-constructed conservative investment profile. We also look at the evolution of green and sustainability-linked bonds.

Fixed Income Investments

Fixed income is a class of defensively focused investments and generally includes:

• At-call cash accounts and term deposits
• Government and corporate bonds
• Private debt

These investments are effectively loan instruments, whereby an investor is lending money to a borrower that is a bank, government or company. The borrower is obligated to pay an agreed rate of interest through the life of the loan. At the end of the agreed loan term the borrower is required to pay the initial investment back, which may or may not be secured with an asset backing the loan.

Bond investments

Whilst most Australians are familiar with at-call bank accounts, term deposits, and private debt such as personal mortgages, few have had experience with government and corporate bonds.

Government and corporate bonds are loan investments where a government, bank or company borrows from investors and agrees to pay interest, known as the coupon, on their principal amount, known as the face value. Coupons are paid until the bond’s maturity date, at which point the principal amount is repaid. For example, a bank issued bond with a 5-year term, a$100,000 face value and a 6% coupon rate will pay $6,000 income each year.

Bond investment returns are measured in ‘yield’, which is the annual investment return. The above example has a yield of 6% per annum.

Dependant on the credit quality of the issuer, investors in high quality corporate bonds can generally generate a yield premium above cash of between 1-2%. For defensive investors like charities, earning this additional income can contribute significantly and help combat the effects of higher operational costs. For example, a $10,000,000 bond portfolio with an additional 2% return above term deposits will generate an additional $200,000 per annum in income.

Profit with purpose

A new type of bond that has more recently emerged is green and sustainability-linked bonds. These are specialised fixed-income investments where the loan proceeds are used to fund environmentally and socially responsible projects. The capital raised from investors is channelled into initiatives across areas such as renewable energy, clean transportation, social housing, or sustainable forestry.

For charities and not-for-profit organisations, investing in these instruments offers several advantages. First, it assists in aligning their financial resources with their mission and values. Second, it provides a compelling narrative for donors and supporters, showcasing responsible stewardship. Third, by actively participating in sustainable finance, charities contribute to community engagement and long-term positive change.

How to access the bond market 

Bond markets are mostly ‘over-the-counter’, meaning that they are unlisted and require direct exchange between buyers and sellers of investments. The Australian bond market is very large, active and liquid and is mostly driven by institutional investors managing money for underlying investors.

To access the bond market in Australia, investors need to either go through an investment manager or use a financial intermediary who can provide advice and direct access to the bond market.

Your Evans and Partners financial adviser can provide you with access to a broad range of bonds which can be combined to form the core of a conservative portfolio. More importantly, your adviser understands the requirements of the organisation you represent and can ensure that your portfolio aligns to your investment policy and meets your capital preservation objectives.