Managing Your Investment Portfolio
By Joyce Moed

COLUMBUS, Ohio–With the economy heading more downhill each day, credit unions may find themselves wondering what type of investment strategies they should be using right now.  Credit Union Journal asked corporate credit unions to offer investment advice to CUs.

“When managing your investment portfolio, it is important to have a strategy and stick to it,” said Bob Post, VP, chief investment officer, for Corporate One Federal Credit Union, here. “Your strategy should include laddering your portfolio maturities so you always have funds maturing to reinvest at the current market rates.”

The most popular ladder, Post noted, would be a one-year ladder. However, with a two-year ladder, credit unions make pick up some additional yield, he said.

“For yield, you may want to allocate a small portion of your portfolio to callable structures,” Post advised. “They usually offer additional yield to bullet structures, since you have essentially sold the option to have the investment called away from you. These investments can work well in a rising-rate environment–it is important to have liquidity, or access to it, readily available. You may also want to consider holding slightly more overnight cash investments during the turbulent times.”
Jerry Hermann, investment consultant for Central Corporate Credit Union, in Southfield, Mich.­, recommends SimpliCD certificates, CenCorp certificates and Agency securities, as good investment choices.

“Although FNMA and FHLMC have been in the headlines recently, agency securities remain a good option for term investments,” Hermann said. “Spreads on these securities compared to U.S. Treasuries have widened–despite additional supporting statements from the U.S. Treasury in the past few months–and the securities are available for reverse repurchase opportunities.”

David Savoie, president and CEO of Louisiana Corporate Credit Union in Metairie, La., said he is seeing credit unions keeping their investments short-term right now, either overnight money market accounts or short-term CDs.

“Given a fairly high level of uncertainty right now regarding the future dir ection and speed of interest rate changes, that makes sense,” he said. “With relatively little room for downside interest rate moves, compared to the upside, I’d advice credit unions to stay short keep their options open.”

Ways to do that include money market accounts, three-month to one-year CDs, and fixed callable certificates with six-month to one-year lockouts and three-year or less to final maturity, he advised.

“Where credit unions formally spent the lion’s share of their pre-purchase analysis on interest rate risk, the current environment requires credit risk to be a part of every pre-purchase analysis,” Savoie said. “The principle of risk vs. reward is not suspended in any segment of the investment arena.”

First Carolina Corporate Credit Union in Greensboro, N.C. is recommending that credit unions try to remain as liquid as possible at present.

“In the market we are living in today, liquidity is critical,” said Fred Eisel, SVP, chief investment officer of First Carolina Corporate CU.

Eisel said a large percentage of its credit unions are experiencing a slowing or declining deposit growth. Yet at the same time, many of these CUs have seen their loan demand increase dramatically–especially those active in mortgage lending.

“They continue to use their excess cash and are allowing investments to mature in order to continue to fund loans,” Eisel said. “As the economy continues to struggle, and credit for many members has begun to remain limited, deposit levels may continue to be at very low levels.”
However, if a credit union does have cash and is looking to invest, Eisel agrees with Savoie in that they remain fairly short. He advises them to continue to work on their ladder from short-term floating rate overnight-type accounts, our to term fixed-rate certificates.

“This ensures the credit unions have excess cash if loan demand remains strong, and the ability to reinvest if rates begin to head higher in the near-term,” he noted.

Bruce Six, SVP/asset liability management, for Mid-Atlantic Corporate Federal Credit Union, said that credit unions should always look to invest in their members before looking to invest in certificates, debentures or mortgage-backed securities.

“Credit unions have right now what will probably go down in history as the best opportunity ever to show their membership and potential members why credit unions are better options than banks,” Six said. “Current weakness of bank balance sheets are generally strong and capable of making loans the banks cannot. It is important for credit unions to maintain their lending standards during this time, and most should find that demand from well-qualified members will be strong.”
Six said that while different investment strategies may suit different credit unions, a general review of the current economic condition can help formulate an effective investment strategy.
“A good generic investment strategy for credit union unions to employ in this environment is a blended portfolio of short-term fix rate investments and intermediate term fixed rate investments distributed with approximately 55% of the portfolio in short-term fix-rate securities or certificates, and the remaining 45% invested in the intermediate fixed-rate investments,” he said. “The rates available on the short-term and intermediate-term investments will be similar, but investing more of the portfolio longer than one year will expose the portfolio to interest-rate risk as the Fed returns to its focus to inflation and rates rise from the current low-rate environment.”

This strategy will not produce great returns, Six said, but should yield stable returns, and positions the credit union to take advantage of higher rates as the general economic downturn settles.
“As always, credit unions should model their investment strategies over various interest-rate scenarios to assess the impact on income and determine the best blend of investments that fit their required returns and potential risk-to-income,” he said. “Also credit unions can never forget that the investment portfolio is just one part of the balance sheet and that a complete balance sheet analysis will always yield the best decision-making process.”

www.corporateone.coop
www.cencorpcu.com
www.lacorp.com
www.firstcarolina.org
www.midatlanticcorp.org