6 traits of top-notch investment portfolio management

Can credit unions manage their liquidity and interest rate risk and still improve their earnings?

“Yes, but there are some trade-offs,” says Ryan Hayhurst, managing director of The Baker Group.

He addressed the CUNA Economics & Investments Conference Tuesday in Las Vegas.

Net-interest margins remain near 15-year lows, Hayhurst says. He advises using investments to boost the bottom line.

Consider these six characteristics of high-performing investment portfolio management:

1. Use the investment portfolio to fight margin erosion. “The bond portfolio is the only place we can increase margin without hurting the membership,” Hayhurst says.
2. Define, measure, and manage. Define your portfolio objectives and risk tolerance, measure your risk exposure, and manage your risk. “Actively manage the portfolio in the context of your balance sheet,” he says.
3. Develop a written investment strategy. “Build a portfolio,” Hayhurst says, “don’t be sold one. Be proactive, not reactive, with a disciplined investment strategy.”
4. Diversify the portfolio across sectors and within sectors. Each sector has its pros and cons. Diversification protects against a range of interest-rate scenarios, he says.
5. Minimize cash and certificates of deposits (CDs) in favor of bonds. “High-performance portfolios tend to own less cash and CDs, and more mortgage-backed securities and CMOs [collateralized mortgage obligations],” he says.
6. Build a portfolio of stable, predictable cash flow. “Steady, consistent cash flow is the best natural hedge against rising rates,” Hayhurst says.

In short: “Stay diversified, focus on mortgages, and find the best relative value.”

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