ORLANDO, Fla.–Credit union CFOs here were given a primer—and some direction—on their investment portfolios.
Steven Houle, VP-advisory service with Catalyst Strategic Solutions, told the CUNA CFO Council Conference here that the last decade has probably been the most challenging 10 years ever for managing investments due to prolonged low rates, reviewed some general trends related to credit union investments. The new challenge for many, he acknowledged is maintaining a liquidity profile that fits the strong lending volumes many CUs are seeing, and he stressed having some sort of investment ladder in place to ensure all the cash flows a credit union needs are in place.
Several times during his remarks Houle emphasized that credit unions need to minimize their holdings of cash. “The more cash you hold the more you underperform your peers. Staying short has not paid off,” he said. “Just being in something is better than being in cash.”
Houle said he believes the market is now close to the bottom on loan yield at about 450 BPs, which is why the market is seeing an “uptick” in investments. He added he’s been struck by the volume of investments credit unions have been making in Treasuries, although by a show of hands no one in the room at Houle’s presentation said they were currently invested in Treasuries.
“I think some of these shifts in allocations are a function of spread. Agency bullets are right on top of Treasuries,” he said. “Investment durations have actually increased a bit. Cash has doubled since 2006. But what’s interesting is credit unions have reduced our less-than-one-year exposure, which is now about 25%. Credit unions have doubled investments in three-to-five years, and also increased durations out to 10 years.”
The four Key components of sound portfolio management, according to Houle, are:
- Setting the investment objectives: What are the goals of the credit union’s investment portfolio?
- Establishing practices and procedures. What directions and limitations have been set by the board?
- Selecting the portfolio strategy. What is the investment portfolio strategy given the credit union’s current and future balance sheet profile?
- Measuring and evaluating performance. Are the investment assets achieving the desired strategic objectives?
Looking at all the risks a credit union must consider--interest rate risk, liquidity risk, reinvestment risk and credit risk–Houle said he doesn’t consider investment rate risk to be much of an issue, even though rates have been rising and NCUA has been pointing to IRR for several. “But that could change depending on the changes in the yield curve,” he reminded.
Other investment-related points made by Houle:
- There are opportunities in certificates to get 40 to 50 basis points over the curve.
- Spreads have tightened on callables.
- There is a strong probability that the Fed will move on rates again this summer and again in December. “The key there is what will the shape of the yield curve be if the Fed moves,” he said.
- Houle said he would focus on seasoned mortgage collateral, something that might come off quickly if a credit union wants to take advantage to big changes in curve.