John Lynch is Education Industry Manager for Truist, Max Anthony is Head of Institutional Client Strategy for Sterling Capital Management, and Corey Byrd is Senior Client Strategist – Education Specialty for Sterling Capital Management.
With a rising rate cycle, public and private higher education institutions are seeing a core component of financial discipline—their short-term investment strategy—rise in importance. Now, getting your short-term investment strategy right has an even greater impact on your financial returns, not to mention its effect on your ability to manage liquidity, address your cash flow cycle, and deliver on your organization’s mission.
As a steward of your assets, you must ensure your teams and your external advisors are handling your reserves as effectively as possible, adhering to your investment policy, keeping your investments in line with regulatory parameters, and actively managing risk while also optimizing short-term returns.
Whether you’re a larger school with more staff and an adequate line of sight on your cash cycles, or a smaller school with more limited resources and investment management tools, today’s rate environment signals the right time to reevaluate your approach to managing short-term assets.
Start with your investment policy.
By tying your financial strategy to concrete goals, specific tactics, and operating guardrails, your investment policy forms your financial foundation. It gives you an accessible framework for managing seasonal and event-based ebbs and flows and provides a disciplined way to target higher yields and risk-adjusted returns on reserves and strategic balance sheet cash. It’s also essential to risk management.
Investment policies are prescriptive by design and usually state investment objectives and goals, define specific investment strategies and asset allocations, and outline permitted exposures and constraints to provide clear guidance to investment managers and standards to monitor policy compliance.
Whether your institution is subject to investment statutes or not, investment policies are a best practice and key to sound governance. Operating without one can create unintended financial risk, liquidity issues, and undue financial strain.
If you don’t have an investment policy, creating one is a great first step. If you have one that’s outdated, make it a priority to refresh it and set a plan for annual reviews.
There’s a substantial body of expertise that you can access to help you with your investment policy. The investment policies used by higher education institutions contain common elements that you can adapt for your own policy. Non-profit hospitals and corporations deal with similar cash flow, investment options, governance, and overall responsibility issues that can also be applied.
Whether you’re creating your first policy or refreshing one that’s outdated, you’ll want to ask: Does it fit your current standards for prudence? Is it too open-ended? Or is it too restrictive? Does it consider the investment instruments available today and the rate environment that we’re entering? Does it call for a level of Environmental, Social, Governance (ESG) goals that follows your institution’s principles?
Wherever you are with your investment policy, fiduciaries or other financial advisors should be able to offer guidance. Whoever you turn to and however you build your policy, take the opportunity to incorporate standards to measure your level of risk and financial progress.
Putting policy into practice with reserves and liquidity
Cash forecasting and management become more challenging when you need to meet liquidity and reserve requirements to account for planned events (such as seasonal tuition revenues and planned expenses) as well as unexpected events. In addition, public institutions may need to adhere to statutory limitations, requiring the use of certain securities, durations, and curve exposures. Private institutions may have inherently greater flexibility and more opportunities to find higher yields and greater returns.
