Trust Funds

Discontinuation of Annual Automatic Sweep to Intermediate Term Fund

As of this fiscal year end (June 30, 2012), Trust Funds will no longer be conducting an automatic sweep of excess Income Cash Fund balances to the Intermediate Term Fund.  In the past, the Income Cash Fund balances in excess of the amount of total earnings credited to the Income Fund for the most recent full fiscal year, were automatically transferred to the Intermediate Term Fund but remained spendable.  The objective here was to generate somewhat higher investment returns as and when departments were not fully utilizing their available cash balances each year (or in some cases, over multiple years), while still maintaining at least one year’s worth of earnings distributions in cash at the beginning of each fiscal year.

This automated sweep of excess Income Cash Fund balances is now being discontinued primarily for the following reasons:

  • While we continue to expect the Intermediate Term Fund to generate significantly higher investment returns than the Income Fund over time (e.g., 1 to 5+ years), the Intermediate Term Fund now has relatively small allocations to both equities (normally around 15%) and higher yielding, lower quality bonds (normally around 5%).  In the past, the Fund was comprised entirely of higher quality, intermediate maturity bonds.  While this change in asset allocation adds further diversification and should actually improve the risk/return profile of the Fund over 1 to 5+ year timeframes, it may also lead to somewhat greater return volatility and a potential for a larger “drawdown” on a shorter term basis, relative to the prior less diversified, all-bond asset allocation.  Therefore, we believe that this newer asset allocation may not always be appropriate for these excess earnings balances that remain fully and immediately expendable.
  • Even though the automatic sweep could be “turned off” by department request, this was very rarely done at the initiative of departments, suggesting that many or most were unaware of the implications of the sweep.
  • For the Office of Trust Funds, discontinuing the sweep will be administratively easier and will result in less frequent “buys and sells” of the shares of the Intermediate Term Fund.

 

PLEASE NOTE THAT IT IS NOW UP TO THE DEPARTMENTS AND UNITS THAT CONTROL UW TRUST FUNDS ACCOUNTS TO BETTER MONITOR THEIR SPENDABLE BALANCES AND THE INVESTMENT OF THOSE BALANCES.  OTHER THAN THE EXISTING BALANCES IN THE LONG TERM FUND FOR ENDOWMENT ACCOUNTS WHICH MUST REMAIN THERE, OTHER BALANCES CAN BE INVESTED/RE-INVESTED UPON REQUEST AS DEPARTMENTS MAY SEE FIT.  ADVICE ON SUCH DECISIONS IS ALWAYS AVAILABLE FROM THE OFFICE OF TRUST FUNDS.