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2014… Where do we go from here?

Sarina Freedland Senior Investment Officer Registered Representative for CU Investment Solutions LLC. 2014… Where do we go from here?. Agenda. Why did credit union investing change? Is it changed forever? What’s your strategic activity comfort level? Active or passive. Explosion of cash.

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2014… Where do we go from here?

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  1. Sarina Freedland Senior Investment Officer Registered Representative for CU Investment Solutions LLC 2014…Where do we go from here?

  2. Agenda • Why did credit union investing change? • Is it changed forever? • What’s your strategic activity comfort level? • Active or passive

  3. Explosion of cash

  4. Loan to share 2008 to 2014 83.1% 71.7% 68.1% Source: Callahan & Associates, Peer-to-Peer Analytics

  5. Cash vs Investments

  6. Another snapshot – rate environment Historic Yield Curve Trend

  7. Investments up, yields down

  8. Stretching for more yield

  9. Where the money was - 2008

  10. Where the money is - NOW

  11. Where do we go from here? Interest rate projection Bloomberg Economist Consensus 9/22/14 Lending and Deposit Projection

  12. Broaden your perspective

  13. Investment Sector issues: CD depth and rates • Residual effect of financial crisis/recession • Diminishing supply of CDs • Re-pricing in a rising rate environment

  14. Investment Sector issues: GSEs • Uncertain future • Re-vamped government entity or private company • Winding down balance sheets – changing amount of new issuance

  15. Investment Sector issues: Mortgage origination Mortgage origination vs 30-year rate

  16. Raise your hand • What Portfolio Management Strategy are you using? • Laddered Portfolio • Target Average Life or Duration • Barbell Strategy • Total Return Strategy • Other or Don’t Know

  17. Strategy Comfort Zone Are you • Passive - a walk around the park • Laddering • Duration targeted • Barbell • Active - triathlon winner –Total Return

  18. Laddering – the most basic • Tried and true strategy • Liquidity drives decisions • Maturities = rungs of the ladder • CDs • Agency debt, bullets & callables • Monthly, quarterly, annually

  19. An investment ladder

  20. Target Duration (Average Life) Determining the average life or duration • Match to balance sheet liabilities • Point on yield curve • Randomly chosen target (not ideal)

  21. Assets vs Liability average life

  22. Consider the yield curve Historic Yield Curve Trend

  23. MBS – more flexibility • Mortgage backed securities (MBS) • More cash flow • More yield • More uncertainty • Story bonds • Underlying loans, new or old • Geographic location • Credit score • In place of originating loans? Portfolio Holdings up 10%

  24. Barbell Strategy Yield Longer term CDs, bullets, callables, MBS/CMOs, SBAs, Munis Cash Flow Cash, shorter term CDs, bullets, callables, floaters, or short ave. life MBS/CMOs

  25. Barbell Strategy Historic Yield Curve Trend

  26. Cash flow patterns of different securities Principal Interest Fixed maturities enhance spread under declining rates but could be adverse in rising rates. Callables redeem early in declining rates and can be adverse in rising rates. Amortizing structures best in rising rates providing needed cash flow for higher reinvestment but can be unpredictable. Declining rates could result in faster cash flows creating lower investment yields. Straightforward U.S. Treasuries Certificates of Deposit Agency Bullets Called or matured? Agency Callables Agency Step ups Callable CDs Erratic Agency MBSs Amortizing Structures

  27. Total Rate of Return strategy • ACTIVE management approach • Goal of beating a benchmark • Must have an horizon time period • Increased RISK with hope of increased REWARD • Continuous monitoring & adjusting • Be willing to sell and take loss

  28. TRR - details • Calculation of Return • Interest Earned + Price Movement =TRR over a specific horizon • Considerations • More robust reporting needed • Willingness to sell at a loss • More volatile than passive strategies • Use products with little on no negative convexity

  29. What is right for you? • No one right way • Look at your credit union’s appetite for risk and reward • Consider cash flow, ALM, balance sheet, ability to pay attention DAILY

  30. 2014…Where do we go from here? Questions? Sarina FreedlandSenior Investment OfficerRegistered Representative for CU Investment Solutions LLC214-703-7602sfreedland@catalystcorp.org

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