Government Securities And Bonds Can See You Through The Short Term.

Wall Street used to be called a roller coaster. Now, it's more of a water flume. But, you don't have to get wet.

While there may be a $30,000 a year limit in purchasing U.S. Savings Bonds, this still might be a prudent and safe short-term investment for small or medium-sized nonprofits. Larger nonprofits may actually wish to diversify investment portfolios with a range of U.S. Treasury-backed securities and debt obligations.

Returns may not be as lucrative, or as volatile, as those obtained on the speculative stock market, but the government-backed investments do offer a "safe haven," especially in the present questionable economy.

"We haven't been too conservative, and we usually set aside funds for the long term," said William C. Love, chair of the American Civil Liberties Union Investment Advisory Committee in New York. "Our basic allocation is 65 percent in equities and 35 percent in fixed incomes, primarily laddered treasury notes over a 10-year period. But, at various other times, we have gone for long, extended terms of up to 15 years," said Love. "We are presently looking at buying government agency bonds, such as Fannie Maes and Freddie Macs. We find that the agencies have slightly more risk, but not very much. A better return, but not as liquid as treasuries."

Love maintained that government securities and bond investments are safe if held to maturity "We rarely sell them before their maturity dates," he said, adding that ACLU also buys AA or higher/better rated for corporate bonds.

"We want marketable securities to sell if we have to," said Love. "What is attractive about government securities is that you can track them daily. And, when you are getting ready to make a purchase you have some idea as to how much you will be spending. This is in contrast to corporate bonds where you might not be able to get an idea or a current printed quote as to how much these will ultimately cost."

ACLU takes a long-term of view, and it has not pulled back because of the present stock market situation, he said.

Nonprofits may be taking a more cautious stance as to the image of how they account for their funds, let alone safely invest them.

Said Dan Busby, vice president for member and donor services at the Evangelical Council FOR Financial Accountability (ECFA) in Washington, D.C., "Some would criticize charities for having ANY funds to invest. But, in reality, charities need excess funds to handle routine operational cash flow and fluctuations in their annual income stream. Additionally, many charities have significant donor-restricted balances for projects. The money for some of these projects will not be expended in the short term. The board of directors of a charity may also set aside (designate) funds to future projects."

ECFA has nearly 1,000 member organizations, and many members give priority consideration to government-backed securities for funds that are not needed for operational purposes. "This investment approach is consistent with the conservative bent of our members," said Busby.

Investment in government-backed securities is especially popular for organizations with modest amounts to invest and with a relatively short investment time horizon, said Busby. "Our larger members, with larger amounts to invest and longer investment time-horizons tend to diversify in the investment marketplace!'

Gregg Capin, a partner in the Greenwood, Ind. accounting firm Capin Grouse, LLP said that, "A lot the larger organizations and universities have always had more diversified portfolios than the smaller nonprofits, and they were traditionally able to obtain a reasonable return with fairly low risk by using treasuries and certificates of deposits from federally-insured banks!'

Capin pointed out that the 1990s, however, had forced non-profits to look into other investments to reach reasonable returns, although a lot of nonprofits pulled away from the market as they are traditionally conservative and used government-backed securities and treasury obligations.

Sometimes it may or may not be wise to be conservative. Robert Leavy, managing partner of Not-for-Profit Organizations for Grant Thornton in Boston, believes that every nonprofit organization should have an investment policy. "One of the critical pieces of such a policy is setting an appropriate risk tolerance for your organization. There are several key factors in determining what a particular organization's risk tolerance should be."

Leavy said, "Time horizon is a primary determinant of risk tolerance. The shorter the time before the organization must need the funds, the more conservative its investment policy must be. If the organization's time horizon is not as significant, which might be a function of it having substantial funds available for investment, then it can reasonably conclude to set a higher risk tolerance for its investment strategies!'

While government-backed investments may be the safest, Leavy said, "If your organization does in fact have a long-term horizon, setting too conservative a strategy has its own pitfalls. If you invest in securities that do not keep up with inflation, the purchasing power of your investment portfolio could be eroded!

Derek Young, vice president, strategic services, Fidelity Management Trust Company, Boston, explained that "Endowments and foundations should build their portfolios based on specific goals for return and risk. Based on these return and risk targets, they should build an optimal plan with an opportunity set of asset classes that are consistent with their investment philosophy and asset allocation policy with respect to such issues as time horizon and liquidity."

Young said, "While this opportunity may include government-backed securities, decisions about which asset classes to include in the portfolio cannot be made in isolation. Instead, asset class decisions should be based on the diversification benefits of combining various asset classes to achieve long-term targeted risk-adjusted return."

What's Available In Government-Backed Investing

Government-backed investments offer a safe suite of fiscal vehicles for the conservative or stock market-wary nonprofit.

"The guiding principle here is the safety in that the government pays its bills," said Pete Hollenbach, spokesperson for the Bureau of the Public Debt. "Consider first the needs of the investor. What is their risk tolerance? Principle is generally protected. Still, there are risks. Consider, if interest rates go down, then the price of a fixed income security will go up -- and vice versa."

Following is a short menu of investment choices from the U.S. Treasury 

Treasury Bills (T-bills) are short-term debt instruments that mature in one year or less from their issue date. Bought at a price less than par (face) value, they pay par value at maturity. The interest earned is the difference between the purchase price and the maturity value.

Treasury Securities

There are two kinds of Treasury notes and bonds. Both pay interest twice a year There are the fixed. principle notes and bonds that pay a fixed rate of interest every six months until maturity. The difference is in term to wait before maturity. Treasury notes mature in more than a year but not more than 10 years from their issue date.

Bonds mature in more than 10 years from their issue date. Inflation-indexed securities' principal value is adjusted to reflect inflation as measured by the Consumer Price Index.

Semi-annual interest payments and the maturity payments are calculated based on the inflation-adjusted principal value of the security.

Treasury securities can be obtained from brokers or bought through either competitive or non-competitive bidding at any of more 150 government auctions. If bid noncompetitively, as most individual investors do, the full amount of the security is received at the auction-determined return. The bid limit is $1 million in a bill auction or $5 million in a note or bond auction.

In competitive bidding, return-the rate for bills or the yield for notes and bonds--is bid for. Bidding competitively lets you bid higher than in the noncompetitive auctions, but there is a risk that the securities bid for might not be awarded.

U.S. Savings Bonds

Series EE bonds are accrual securities. Interest is periodically added to the amount originally paid to establish their current redemption value. This series earns market-based rates for a 30-year term, although they can be cashed any time after holding them for six months. The current rate through April, 2001 is 5.54 percent.

Series I

Series I bonds are an accrual security, bought at a face amount, that grows in value with inflation-indexed earnings for up to 30 years. Its earnings rate is a combination of a fixed rate of return and a variable semiannual inflation rate. The current rate through April, 2001 is 6.49 percent.

Note: Series EE and I bonds can be purchased in denominations of $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000. Both kinds have an annual purchase limit of $30,000.

Series HH `

Series HH bonds are current-income securities that do not increase in value. Pay the bond's face amount ($500, $1,000 $5,000; or $10,000) and interest is paid each six months, via a direct deposit. The current rate of 4 percent has been in effect since March 1, 1993. HH bonds cannot be bought for cash Instead, one can exchange EE/E bonds, or reinvest the proceeds of matured Series H bonds, for them.