Discovery Conference

Enhance Your CU’s Investment Portfolio

Re-examine your investment style to build a solid portfolio.

October 7, 2011

Credit union leaders should set aside personal investment biases and change their investment styles to build a solid investment portfolio, two MEMBERS Capital Advisors analysts told attendees at CUNA Mutual Group’s Online Discovery Conference.

“Many of us have personal investment biases that need to be justified in today’s economic environment,” said Ed Meier, director and senior fixed income portfolio manager. “For example, in the early ‘90s many investors swore off investing in CMOs [collateralized mortgage obligations]. While that may have made sense at the time, it doesn’t today. CMOs are typically underutilized.”

Today, investors must consider all of their options and quantify their risks. “Ask yourself the question, ‘How does this optimize my credit union’s portfolio?’ If it doesn’t, then move on,” Meier said.

This can be challenging, especially with many investors having a conservative investment style. But the gain to the credit union’s bottom-line can be substantial.

Credit union leaders must consider their institutions’ funding needs, asset/liability management (ALM) model output, and economic outlook before ruling out a particular type of investment.

“Just because an executive investment manager doesn’t like a particular investment doesn’t mean it isn’t a good investment for the credit union,” said Jeremy Whitish, CFA senior analyst, investment risk.

Credit union leaders need to think about their investment strategies differently today than they did 20 years ago. Most portfolios are excessively short in duration, Meier said. Credit unions should build in cornerstone securities, which have a potential for a higher yield and longer duration but maintain top-tier quality.

“It’s critical for investors to understand their credit union’s ALM model because if you don’t have loans on your books, you must have investments that match or reach longer term than your liability stream,” Meier said. “We propose having a core group of cornerstone investments in your portfolio—no matter if it’s good times or bad, rising rates or lower rates—because it acts as a hedge you can rely on despite the times or rates.”

Meier and Whitish advise taking a balanced approach to investing. Today, that means reducing liquidity, investing in slightly longer-term securities to guard against economic uncertainties, and adopting a flexible investment style that limits personal investment biases.

“The best way to build a strong investment portfolio is to use all of the investment tools your credit union’s charter and investment policy allow,” Whitish said. “If you don’t, you will continue to struggle to build a solid investment portfolio for your credit union.”