Where Did Our Operating Income Go?

September 15, 2016 |
2 minute read

Treasury managers face a new challenge to an old problem. Their institutions historically have relied on operating investment income to provide a necessary influx to operating budgets. Prior to 2008, risk free or minimal risk investments provided support for operations with returns that are currently unimaginable. The concept of a risk-free instrument yielding anything significantly above 0 percent in the future does not take into account the post crisis world of capital markets, specifically cash markets. So, the world of five percent cash returns is gone, and has little chance of re-emerging. This leaves a shortfall in how treasury managers balance budgets and fund capital initiatives going forward.


The current environment has been evolving since 2009 and the last piece of this return free market – structural and operational changes for money market funds – will be implemented this October by the SEC, completing a seven year process. With this final change, the SEC has made it extremely difficult to generate significantly higher than 3-month U.S. Treasury bill returns from a stable value fund. This means that Endowments and Foundations that manage operating cash cannot “do nothing” and expect an adequate return on cash investments. Rather, they will have to develop and execute a broader investment policy to try to earn higher returns. Making the issue more complicated, money market and traditional short-dated fixed income instruments will continue to be challenged in the coming years, stemming from a restart of the process to normalize interest rates by the Federal Reserve.
This paradigm mandates that treasury managers and overseers of operating cash manage risk and returns in a manner appropriate for operating assets. Becoming an investor requires identifying the acceptable risk and executing a strategy that gets the organization to its stated goal(s).

The college lost annual income from markets prior to 2008; it was our obligation to students and programs to rethink how the college invests operating assets.
— John Glavin, Vice President for Administration and Treasurer, Delaware County Community College

This brings us to three options for today’s treasury manager.

Option one is to adopt the “old school” methodology, or take what the risk free market gives you. Some would categorize this as the “do no harm” option. In the current markets, and the new structure of cash investments, this option gives the investor no reward for accumulated reserves. The fallacy of this mindset is that this option is truly risk free. If we learned anything in 2008, it is that assumed liquidity and risk free options can be illusionary in times of stress. Assuming any asset is truly risk free is the most significant risk within the world of the treasury manager.

Option two is the “Reaching for Yield” strategy, which is predicated on the hope that higher yields won’t come with any downside. In actuality, this strategy incorporates two risks, duration and credit. Investors in the 1990’s and early 2000’s enjoyed periods in which putting 50 percent of your cash in short duration strategies added between 25 to 75 basis points annually with only a few periods of lower returns. Unfortunately, the advantageous environment for fixed income is slowing tremendously as the bull market for fixed income securities is showing signs that it is ending. Six-month Treasury bill yields have increased about 30 basis points during the past year to 55 basis points, while 10-year Treasury yields have backed up about 35 basis points from their 1.32 percent intra-day low in early July 2016. As we move toward a rising rate environment this option will have many “bumps in the road” or periods when short duration could underperform cash.

Option three for the treasury manager is to construct a diversified portfolio that adds resources over time while maintaining appropriate risks. At Commonfund, we define this option as the Treasury+ Model. Each organization has its own unique goals and risk tolerance to reach those goals. This model takes those unique characteristics into account.

Ryan Driscoll


Ryan Driscoll

Managing Director

Stay connected with the Insights Blog

Popular Blog Posts

Market Commentary | Insights Blog

Chart of the Month | The Surprising Relationship Between Money Supply and Inflation

The potential for rising inflation is becoming a top concern for many investors and consumers. Many believe that inflation is already here as evidenced by price increases in commodities, homes,...
Perspectives | Insights Blog

The Case for Using the Higher Education Price Index® (HEPI) to Define Inflation for Colleges

When calculating return targets for an endowment portfolio, a conventional piece of the equation is often the Consumer Price Index (CPI). CPI plus 5% is the common short-hand formula for institutions...
Governance And Policy | Insights Blog

Endowment Management and the Three Primary Responsibilities of a Board

The fourth blog in the “Six Ps of Investment Stewardship” series addresses People, specifically how boards function within an organization. To learn more about the first four principles in the series...


Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.