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The Packaging Machinery Manufacturers Institute (PMMI) bolstered its investment revenues by a staggering 200% in only 12 months simply by making the decision to step outside its conservative comfort zone in its investment policy. PMMI's reserves, which experienced significant growth from the financial markets in the mid-1990s, were not immune to the market slowdown of 2000 and 2001. But while the returns have suffered in the short term, PMMI has not wavered from its long-term investment strategy. While PMMI has not veered from its long-term strategy, it has continued to monitor and, as necessary, adjust it to help ensure long-term growth of the reserve fund.

Editor's note: In the June 1998 issue of ASSOCIATION MANAGEMENT, Craig Silverio, CAE, then director of finance for the Packaging Machinery Manufacturers Institute (PMMI), Arlington, Virginia, recounted how his organization bolstered its investment revenues by a staggering 200 percent in only 12 months simply by making the decision "to step outside of its conservative comfort zone" in its investment policy.

That was a fashionable story line back then. With the dot-com phenomenon soon to reach its apex and the stock market on a seemingly endless upward trajectory, the investment culture, giddy with both the prospect and realization of ever-rising returns, seemed to toss aside some of the most basic of investment tenets, such as that a more aggressive investment strategy means more risk, or that what goes up must come down.

Now that the inevitable downturn in the economic cycle has come (and hopefully gone), ASSOCIATION MANAGEMENT asked Silverio, now vice president of finance at PMMI, to report on how his organization's reserves have fared-and whether the previously espoused "conservative comfort zone" looks like a more attractive option these days.

PMMI's reserves, which experienced significant growth from the financial markets in the mid-1990s, were not immune to the market slowdown of 2000 and 2001. But while our returns have suffered in the short term, we have not wavered from our long-term investment strategy.

Since PMMI began investing in stocks in 1994, it has managed an average combined annual return (including both stocks and bonds), net of fees, of 10.3 percent-despite a dismal 2001 return of -12.6 percent. Most importantly, in spite of our 2001 results, the 10.3 percent average return significantly exceeded the 4-5 percent returns that the institute was receiving from its former policy of laddering CDs (buying CDs with different dates of maturity and rolling them over into new CDs once they mature). Starting with an investment base of $7 million in 1994, this translated into hundreds of thousands of dollars in additional investment revenue.

DIVERSIFICATION-WITH EQUITIES ON THE HIGH SIDE

While PMMI has not wavered on its longterm strategy, it has continued to monitor and, as necessary, adjust it to help ensure long-term growth of the reserve fund. PMMI added a fixed-income manager in 1998 to manage the bond portion of the portfolio. In early 2001, based on concerns that large-capitalization, or large-cap, stocks were overvalued, PMMI added managers to oversee both mid-- cap growth and international stocks. Thus far, this move has proven to be a wise one, as both of the new managers provided better returns in 2001 than did the large-cap managers.

Meanwhile, as the reserve fund has grown, PMMI has continued to increase its asset allocation in stocks-all the way up until the time of the economic downturn. In 1998 we increased the stock allocation from 50 percent to 65 percent, and in 2000 we raised it again to 80 percent, where it stands today. The portfolio is rebalanced quarterly to maintain the 80-- 20 equity-to-fixed-income split; regularly scheduled rebalancing helps ensure that you buy new securities low and sell older securities high.

Incidentally, even after taking into consideration that our strategy is a long-term one, we did not fare all that poorly in the past couple of years, in spite of our 80 percent equities allocation. In 2000 PMMI's net return of 0.7 percent exceeded the market index of -4.2 percent. In 2001, the institute reported a -12.6 percent return, versus the index of -7.7 percent. So, despite the less-than-stellar performance of the financial markets, PMMI managed to hold its own in the marketplace over the two-year period.

AN UNCONVENTIONAL USE OF RESERVES

Our official policy, which is somewhat unusual, is to maintain a reserve fund of 200 percent of annual operating expenses. Admittedly, this rather high percentage is partially attributable to the mere fact that at the time we formulated the policy, we had $20 million in the bank and a $10 million operating budget. Having said that, PMMI has benefited from its reserve fund growth in significant ways beyond mere rainy-day reserve uses. Specifically, the gains from its reserve funds have provided the institute with the capital necessary to become the dominant player for the packaging machinery industry on the Internet. Facing competition from for-profit Internet companies like Verticalnet, Malvern, Pennsylvania, PMMI had the financial resources to capture and retain its space as the place to go on the Internet for packaging machinery. We achieved this by investing $7 million to form a for-profit company (packexpo.com, Falls Church, Virginia). Without a reserve policy focused on long-term growth, this opportunity may have been lost. And PMMI's place as the leading trade association and industry resource for packaging machinery may have suffered, as well.

Our high reserve level allows us flexibility as to how funds can be used. In addition to the more traditional rainy-day uses, these funds can be used for anything from normal operating expenses to launching new business services. In other words, our stated policy leaves it fairly open-ended.

GOING FORWARD

While PMMI successfully captured the benefits of the surging stock market in the mid- and late-1990s, the institute always recognized that its reserve policy is a long-term strategy. So, other than some minor changes in stock diversification, PMMI has chosen to stay the course with respect to its asset allocation of stocks and bonds. Despite the recent economic downturn, it is unlikely that the institute would have done anything differently, as its investment strategy is based on proven, long-term investment principles. Yes, there will be some short-term peaks and valleys in performance. Yet even the events of September 11 did not create a need to react rashly. Past events, from the Cuban Missile Crisis to the Persian Gulf War and Oklahoma City bombing, did little to disrupt the markets beyond short-term market volatility.

PMMI constantly reviews its investment strategy to make sure that it is aligned with current economic trends. PMMI staff and its investment adviser keep a pulse on the economic environment and report to the board's finance committee annually. Despite recent diversification into mid-cap and international sectors, PMMI's portfolio still has significant exposure to large-cap growth and value stocks. The institute may eliminate or further reduce one of those sectors, based on the belief that near-term growth will continue to come from smaller companies.

Beyond that, the institute's current reserves, approximately $12 million, are well positioned to participate in future waves of market growth. And we move forward with an investment strategy that, once fashionable, is now commonplace.