1st Step On Investments: Know Your Balance Sheet

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DALLAS-The rock-bottom returns available to credit unions on their investments combined with members who increasingly have become savers has CUs, corporates, and investment advisors across the country experimenting with different strategies to resolve the liquidity challenge.

Some see active portfolio management-squeezing as much yield as possible out of every investment opportunity-as a partial solution. Making more accurate predictions on needs for operating cash to reduce overnight funds balances is becoming a necessity, as has for many CUs lowering deposit rates to just basis points. According to one investment advisor, better management of investments starts with the credit union having a strong understanding of the balance sheet.

"There isn't one magical security type that is appropriate for everyone," offered Jason Haley, fixed income strategist for ALM First Financial Advisors. "We emphasize that investment decision makers need to know their specific balance sheet very well in order to know what type of security is most applicable."

Haley pointed to three strategies to help portfolio managers navigate the low-interest-rate environment. With low yields and high dollar prices on mortgage-backed securities, Haley said it is more important than ever that the credit union have adequate analytical tools at their disposal to assess value and risk of investment choices, such those available from Markit or ZM Financial Systems .

"I'd also ask portfolio managers if they are seeing all potential and possible investments," said Haley, emphasizing the buying power and ability to see more investment opportunities brokers can provide.

Haley believes it is wise for CFOs to adopt an active investment management strategy. "For example, credit unions can buy securities and sell them prior to maturity in order to enhance return-if their investment policy and strategy allow it. Based on our outlook for rates and the current record steepness of the yield curve, we believe there are opportunities in the market now for a more active portfolio management strategy without taking excessive credit and interest rate risk."

Just as important, said Haley, is knowing what not to invest in. "The last time we were in this low-rate environment-in 2003 and 2004-investors began to increase their risk tolerance to achieve more yield. That led to the creation of subprime mortgages, synthetic CDOs, and all the other bad investments that led to this financial crisis."

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