A Classic Approach to Investing

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BY ROBERT PERRY AND JASON HALEY

Far above any individual decision, the decision-making framework is crucial to a credit union’s long-run investing success. And analytical models are a key element of such a substructure. Keep reading for a data- and research-oriented framework that will set your CU on the path to sound portfolio decision-making.

A credit union’s investment portfolio serves an important role within the overall balance sheet management process. And regardless of the portfolio’s objective (liquidity, income, etc.), our ultimate goal should be to maximize return per unit of risk taken. For many financial depositories, the individual(s) responsible for managing the investment portfolio wear(s) many hats, but generating reasonable risk-adjusted returns requires discipline and focus amid an ever-changing market, economic and regulatory landscape. To that end, a credit union should have a well-defined investment process that involves much more than just looking at bonds. Long-run institutional investing is sometimes like watching paint dry – a little boring and a little routine. For success, it’s important to be patient and have a sound, research-oriented and well-defined investment philosophy. In other words, the decision-making methodology we utilize will contribute much more to long-term performance than the individual decisions themselves.

Yet some institutions make many of their investment decisions based on what they are being shown by their brokers. Brokers provide a necessary service but, in the end, they simply offer the ingredients to a recipe that has already been developed. Imagine managing a two- or three-year duration portfolio for 50 years – you’re making hundreds and hundreds of fairly routine decisions. This is what makes the decision-making framework or investment process much more important than any individual decision and it is the crux of this article.

The Investment Process – A Framework for Sound Portfolio Decision-Making

Institutional fixed income portfolio management is best thought of as a “rinse and repeat” process in which portfolio riskiness is increased when compensation for risk is high and vice-versa. For example, if yield spreads and expected returns on corporate bonds or mortgage-backed securities (MBS) are low, portfolio weights and exposure to these assets would also be low.


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