Investment Essentials for Directors. Fred Eisel SVP, Chief Investment Officer

Transcription

1 Investment Essentials for Directors Fred Eisel SVP, Chief Investment Officer

2 Objectives Responsibilities of the Board The purpose of the ALCO Board & ALCO reports Permissible investments Items to consider

3 Responsibilities of the Board Investment portfolio is an important part of the balance sheet Sometimes not given as much attention Encompasses cash management, shortterm and longer term investments

4 Responsibilities of the Board Creation and implementation of the investment policy critical Needs to be reviewed and approved annually Provides direction and guidance for management

5 Responsibilities of the Board Policy discusses investment philosophy and authorities Permissible investments, investment limits, and reports to be supplied to the ALCO each month

6 ALCO The Asset-Liability Committee (ALCO) Board committee made up of select board members and staff Responsible for the general oversight in accomplishing the stated investment objectives The committee should appoint certain staff persons to be responsible for implementing approved investment strategies within the constraints of the investment policies

7 ALCO The committee will recommend to the Board for annual approval: Investment limits for each type of security Limits per institution/organization Approved broker/dealers Committee should ensure that investment risks are properly managed Meets monthly to review portfolio performance

8 ALCO Management should produce monthly reports that review portfolio performance and how it relates to budget Reports should also review balance sheet trends, deposit pricing, and a variety of risk parameters ALCO provides a report to the board

9 Investment Risks Interest rate risk The risk that an investment's value will change due to a change in the absolute level of interest rates As interest rates rise, bond prices fall and vice versa. As interest rates increase, the opportunity cost of holding a bond decreases since investors are able to realize greater yields by switching to other investments that reflect the higher interest rate.

10 Investment Risks Liquidity risk The degree to which an asset or security can be bought or sold in the market without affecting the asset's price Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets

11 Investment Risks Credit risk The risk of loss of principal or loss of a financial reward stemming from a borrower's failure to repay a loan or otherwise meet a contractual obligation This comes into play more on corporate and municipal bonds

12 Investment Risks All investment risk can be managed All need to be addressed in the Investment Policy with risk guidelines and limits

13 Permissible Investments Cash Needs to managed effectively Options include your corporate CU, the Federal Reserve, banks Also could include short-term accounts that mature in days

14 Permissible Investments Bank/CU Certificates (CDs) Most common investment choice for CUs Can buy bank and CU certificates Terms of 3 months to 10 years Most are fixed rate Insured by the FDIC (Banks) or the NCSIF (CU) Can build a nice laddered portfolio with limited risk

15 Permissible Investments Bullets Investor gets interest payments and principal back at maturity Amortizing Investor receives interest and principal on certain payment dates

16 Permissible Investments Securities Also know as marketable securities or bonds Anything bought through a broker Trades openly in the market Covers a wide range of structures

17 Permissible Investments Treasuries Obligations of the US Government Can buy T-Bills (3-12 months), Notes (2-10yrs), and bonds (30yrs) Few CUs buys these, high liquidity but the yield is lower than other options

18 Permissible Investments Agency bonds Issued by: > Government National Mortgage Association, or GNMA, also known as Ginnie Mae > Federal National Mortgage Association, or FNMA, also known as Fannie Mae > Federal Home Loan Mortgage Corporation, or FHLMC, also known as Freddie Mac > Federal Home Loan Bank, or FHLB > Federal Farm Credit Bank, or FFCB

19 Permissible Investments Agency bonds Rates higher than treasuries, very similar liquidity Very popular with CUs (and most investors) Can buy regular bullets (fixed maturity date) or structured bonds (calalbles & step-up, mortgage-backed bonds, etc.)

20 Permissible Investments Other permissible investments are: Small Business Administration (SBA) pools Municipal securities Corporate bonds Mutual funds

21 Items to Consider Only invest in what you know Work with folks you trust Get a second quote on all bond purchases Get proper paperwork for each trade Document why the bond was purchased and how it fits into portfolio Have a strategy, don t just buy bonds that a broker has to sell

22 Review Board of directors are responsible for establishing policies for proper measurement and monitoring of the investment portfolio Also need to establish ALCO and staff responsible for day-to-day management of the investment portfolio

23 Review Board of directors need to be aware of the various investment risks and permissible investments Not effectively managing the CUs cash will have an impact on earnings and the overall balance sheet performance

24 Thank you Conclusion