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Prudent Investor Update, April 3, 2019

Target-date projects: Investing with greater precision

The best investment decisions are based on knowing how much money will be needed and when. That is why for municipal governments, having a strong and detailed asset management plan is helpful. It guides those important decisions about time horizons, which in turn helps determine risk profiles and investment allocations.

A target-date approach takes this kind of investing to an even greater level of precision. It’s a good way to invest to fund large, predictable capital projects, like bridge replacements or arena builds. It means that the municipality can invest funds today in a way that helps maximize returns, manage risk, and still deliver the right amount of money when it is needed. Because it depends on broader investment options, it’s an approach that will work well for municipalities moving to the prudent investor standard and not applicable for those remaining on the legal list.

ONE Investment Manager Keith Taylor explains that for target-date projects, investment allocations are adjusted slowly over time. For a longer-term project, you can take on slightly more risk in the earlier years. This means you have the potential for better returns and can still ride out fluctuations in the market if needed. As the target date nears, the asset mix is adjusted towards more fixed income products with lower risk, until the funds mature on the date needed.

Given the value that this approach offers, ONE Investment plans to offer a Target Date solution under the prudent investor standard that will help municipalities invest based on well-defined financial needs and timelines, Taylor said.

Municipal governments can start by considering  what projects are planned over the long-term that are specific in terms of size and timeline. The target-date based approach is a way to explicitly match the investment solution with a defined need.

This approach is not as useful for projects with less certainty around timeframes. As such, target-based investing represents only a part of a municipality’s overall investment solution. For example, some investments will be geared towards long-term savings that are set aside strictly for contingencies and therefore, unpredictable drawdowns. Another set of investments might also be focused on delivering more stable, long-term returns for needs such as regular infrastructure maintenance.  

ONE wants to help municipalities manage these different kinds of investment needs. To that end, it has been expanding its services to provide clients with a blend of municipal finance and investment expertise to tackle these challenges. It is also developing a mix of new investment solutions to meet municipalities’ varied needs.