Over the past 30 years—spanning four bull and bear markets—an allocation to cash as part of a diversified portfolio of stocks and bonds has produced lower returns, along with commensurately lower volatility. Yet for associations, cash has also served as a vital buffer, offering liquidity leading up to conferences and other annual revenue generators, as well as during times of market stress. That cushion has grown increasingly valuable, especially as choppy markets resurface.

Consider an association spending 5 percent per year from a $5 million portfolio, invested in a 70/30 percent mix of stocks and bonds. After three decades, adding just a 3 to 5 percent allocation to cash shaved over $1 million from the portfolio’s ending value. Yet this so-called “drag” on performance only yielded modest reductions in volatility. That’s because of the need to replenish the cash allocation, often after depleting it during periods of market stress.

That dynamic takes on new meaning right now. Spending during a downturn is always tricky, but even more so as associations consider increasing distributions to meet today’s overwhelming needs. More than ever, associations need a strategic approach to cash to preserve liquidity while minimizing a potential long-term performance drag.

Key Factors for a Savvy Cash Strategy

For board members and investment committees, deploying cash strategically hinges on several factors. First, what is your current baseline? That requires identifying your current cash positions and where they reside, while factoring in your organization’s structure. For instance, certain traditional endowments governed by the Uniform Prudent Management of Institutional Funds Act may have lower, more stringent spending thresholds compared to “board-designated” endowments or other long-term funds. While the latter have been earmarked for multiyear horizons, they’re not legally restricted in the same way.

Next, establish separate investment pools with distinct purposes and attach an investment goal, such as preservation or growth, to each. Be sure to include other sources of cash—such as lines of credit, bonds issued, or borrowing (not trading) on margin. For each, note the available balances and any operational issues that could impede access, along with the cost of maintaining such funds.

Avoid Locking in Losses

With your baseline established, it’s time to plan for contingencies. How much cash will you need looking ahead? Most associations set aside sufficient cash to fund fixed operating expenses for a given period (e.g., six months). But it’s equally important to track the timing of funding those short-term reserves. Do you earmark a given amount monthly, quarterly, or annually? And how do you prioritize revenue sources that may be at risk and require backfilling with cash?

Consider an association supporting the industry-wide education and well-being of businesses in a specific sector. To ensure the vitality of their mission, the board prudently set aside three months of fixed operating expenses—funded monthly. But they overlooked a contingency plan to protect against a dramatic decline in net revenues from their annual conference. Due to the pandemic, as the association incurred higher expenses and generated lower than historic revenues by moving their annual conference to a virtual format, the association was forced to tap their investment portfolio. With the market declining at the same time, they locked in losses, creating an even bigger hole to fill.

Know the Trade-Offs

How can the board avoid a repeat scenario? By adopting a strategic approach to cash covering all spending needs. That means working with your financial advisor to proactively plan for sourcing cash from different asset pools. Below we outline several prompts to help you get started:

How much do you want to set aside (e.g., one year of spending, one quarter?)

How often will you replenish? For instance, will you top it up when it falls below a certain threshold (i.e., 50 percent of the original allocation) or wait until it’s fully depleted?

If you’re currently facing a cash crunch, when should you begin shoring up reserves? Now may be the ideal time given that markets are hovering near all-time highs—and bracing for near-term volatility due to economic headwinds.

Clearly, liquidity plays a central role in ensuring your association’s overall financial health and vitality. Prudent management involves building and implementing a strategic plan for cash—one that strikes a balance between protection and maximizing long-term growth. With savvy positioning, cash can be a lifeline without being a drag.

The views expressed herein do not constitute research, investment advice, or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time. Past performance does not guarantee future results.