How to optimize the return of your credit union’s investment portfolio: Part 1, the basic strategy

first_img“An investment in knowledge pays the best interest.” So said Benjamin Franklin, a guy with good judgment, common sense and who also knew a thing or two about human nature and the world in general. Knowledge about skillfully managing your credit union’s investment portfolio can not only optimize the portfolio’s return, it can help you mange your credit union’s overall interest rate risk, credit risk and liquidity risk too. And you don’t have to be Ben Franklin to do it.In this first article in an exclusive series for CU Insight on managing CU investment portfolios, I’ll summarize both the benefits and the basic steps of skillfully managing your credit union’s investment portfolio, which can limit risk and optimize the portfolio’s return so that you can better serve your members. You can likely do better than simply packing your CU’s investment portfolio with relatively low-yielding CDs and yet still limit your risk to a reasonable level. And although CDs are widely regarded as safe and insured investments, they do come with some liquidity risk. Why? Because they are intended to be held to maturity and they may carry penalties for early withdrawal. In any event, your market haircut can be significant. Holders of CDs who wish to sell them may be required to do so at a discount, particularly in a rising interest rate environment where other, higher-yielding, CDs are available to buyers.Properly managing your CU’s investment portfolio can also help with regulators. The NCUA is concerned about rising interest rates and the effect it will have on CU investment portfolios. In fact, the NCUA expressed this concern in their Economic Update video released on October 1, 2014. In it, the NCUA’s Chief Economist, John Worth, concluded by saying this about rising short-term interest rates and the resulting possibility of narrowing net interest margins for CUs:Here at NCUA, our chief concern is that credit unions are aware and prepare for this possibility. Credit unions should have a firm idea of how their income statements and balance sheets are affected by a rapid rise in short-term rates and they should have a plan for dealing with the potential consequences.As experienced CU executives know, when interest rates rise, the price of bonds fall – including bonds in CU investment portfolios. As a result, the NCUA is concerned that when rates rise, the bonds in CU investment portfolios will lose value and maybe even go underwater. If it’s any consolation, the NCUA is not the only government regulator with these concerns. According to our friends at Invictus Consulting, regulators at two recent banking conferences in California and Nebraska offered insights into the problems they are seeing at community banks. Although we all know that CU’s are regulated by the NCUA, not the OCC or FDIC as banks are, history demonstrates that regulators of CUs and banks frequently share similar concerns and focus during their respective examinations. For example, the Federal Reserve and the OCC, like the NCUA, see interest rate risk as a central issue, though credit risk is also now appearing on their radar screens. The OCC expressed some surprise at these conferences that not all community banks have chief risk officers. And in addition to interest rate risk, the FDIC said it was seeing many banks buying securities for the banks’ investment portfolios that the bankers didn’t fully understand. Many banks should perform better securities due diligence and monitor their unrealized losses, even if they are not required to hold capital against those losses. The FDIC also indicated that banks with increased interest rate risk would be more closely scrutinized. The lesson here? Properly managing your CU’s investment portfolio for optimal return with an eye to managing interest rate risk, credit risk and liquidity risk can help convince regulators (and your board members) that your CU’s balance sheet is in good hands.The basic steps for successfully managing a credit union investment portfolio are simple on the surface. Here they are:Create a plan (e.g., draft a good investment policy);Execute the plan (e.g., buy the right securities at the right price and sell the wrong securities at the right price);Monitor the portfolio on an ongoing basis (e.g., keep an eye on the credit, liquidity and interest rate risk of the securities in the portfolio);Graciously accept accolades for doing a good job (optional, but recommended).As I’ll discuss further in future articles, examiners often look to determine whether your credit union really follows its own investment policy. If you don’t follow the provisions of the policy, whether in the purchase of securities, monitoring of them or any other provision, expect to receive a request for an explanation for it from the examiners regardless of whether your credit union is legally obligated to do it. In other words, if you put it in the policy, you’re expected to comply with it. Incidentally, this applies to all policies – not just investment policies.In my next CU Insight article, I’ll explain step 1, the basics of writing an investment policy, which will be followed a third article about step 2, executing the investment policy by selecting the proper securities for your credit union’s investment portfolio – without paying an arm and a leg for them. The fourth and last article in the series will cover step 3, monitoring your CU’s investments (step 4 is up to you). In the meantime, here’s some food for thought from Warren Buffett (another guy who knows a thing or two about investing and human nature) “Investing is putting out money to be sure of getting more money back later at an appropriate rate.” Simple, right? 12SHARESShareShareSharePrintMailGooglePinterestDiggRedditStumbleuponDeliciousBufferTumblr,David Barnes Mr. Barnes, a licensed attorney and registered investment advisor representative (Series 65), leads the Heber Fuger Wendin team in service to their institutional and individual clients. He became a Heber … Web: www.heberinvestments.com Detailslast_img read more

Viterbi collaborates with Hollywood

first_imgThe Viterbi School of Engineering is collaborating with the National Academy of Engineering, an elected group of the world’s most accomplished engineers, for a worldwide crowdsourcing competition to cast a female engineer for the new MacGyver TV show. The show hopes to inspire more women to pursue engineering.MacGyver, created by Lee Zlotoff, was launched 30 years ago and follows the adventures of a fictional government agent Angus MacGyver, who resourcefully uses his engineering skills to solve problems in each episode.“I was intrigued and excited when the USC Viterbi School of Engineering first suggested the idea of a script competition to help create a new, female engineer-type character for TV,” Zlotoff wrote in an email to the Daily Trojan. “And I was pleased that we could use the name and example of MacGyver to help make this competition a reality.”Adam Smith, the senior manager of communications and marketing at Viterbi and the primary coordinator of this project, said that Hollywood and engineering should be working together to motivate more students to pursue engineering.“This idea of marriage between engineering and Hollywood has been around for a long time,” Smith said. “Andrew Viterbi wrote about how we can use this to elevate engineering to a higher status.”Dan Mote, the president of the National Academy of Engineering, agrees with Smith on the alliance of engineering and Hollywood, emphasizing the importance of exciting women about the prospect of a profession in engineering.“‘The Next MacGyver’ search competition is an opportunity that hits the bull’s eye twice for engineering,” wrote Mote in an email to the Daily Trojan. “First, the program lead is a female engineer who will inspire young women to think about engineering as a career. Second, it provides the public a program on engineering and what engineers do.”Smith said he and his team came up with this idea of reaching out to the National Academy of Engineering for a global competition in 2013, and they wanted to make female engineers the focus. In fall 2014, they received a grant from the United Engineering Foundation.Smith believes that they will be able to inspire more women to pursue engineering through this project.“In terms of changing a national culture, it requires a big catalyst, and we believe that TV and popular culture have a big play in that,” Smith said.He explained that television is filled with problems and conflicts, and engineers are great at finding solutions to solve these.Viterbi student organizations have made efforts to encourage local young women to pursue engineering majors.“In terms of current efforts, this Thursday, the local chapter of Society of Women Engineers and Women in Engineering are hosting an [all-day] workshop for young women in the community,” Smith said.As part of Engineers’ Week, “Introduce a Girl to Engineering Day,” co-hosted by the Association for Computing Machinery, hopes to inspire the next generation of female engineers by introducing the girls to circuits using Circuit Scribe, a rollerball pen that writes with conductive silver ink, while also teaching them about the process of problem-solving and invention.Smith said Dean Yannis C. Yortsos considers the diversity at Viterbi a great accomplishment, citing that of the entering class 37 percent are women, which is double the national average. Additionally, 25 percent of the computer science majors are women.“I think it’s great to see more female leaders in the engineering community and it shows, perhaps maybe more to younger people who are thinking about going into engineering, that women can be engineers as well and it’s just not a male dominated field,” said Morelle Arian, a senior majoring in electrical engineering.“While there has been some debate about whether our country needs more engineers, one thing is certain: engineering needs more women,” Randy Atkins, the senior media relations officer at the National Academy of Engineering, wrote in an email statement to the Daily Trojan. “While more than half the talent pool seems generally turned off by the thought of becoming an engineer, it’s likely most kids don’t even know what an engineer does. Considering that engineers will be key to tackling the [grand challenges] of the 21st century, this is very troubling.”Daisy Leon-Rivera, a junior majoring in biomedical engineering, said she watched [the children’s show] Cyber Chase growing up because she enjoyed the problem-solving techniques and math the characters used.“I think this is a great opportunity to inspire the next generation of … engineers of the future, and I hope it becomes the next big culture,” Leon-Rivera said.Mentors, including Anthony Zuiker, the creator of the CSI franchise, and Roberto Orci, the writer and producer of Sleepy Hollow, will be paired with the finalists.“Now that we’ve launched and have begun to witness the overwhelmingly positive response to this project, I’m even more excited to see what kinds of concepts and scripts the world has in store for us all,” Zlotoff said.By creating a national marketing campaign, Smith said he hopes to raise the profile of women in engineering.“There is an entire generation of great storytellers, and we want them to think of writing female engineering characters. Because if you see strong female engineers, it’s easier to imagine yourself [as] one,” Smith said.last_img read more