22 Hoosier Banker August 2015 DIRECTORS / SENIOR MANAGEMENT There are always some portfolio managers who have convinced themselves, and perhaps others, that they can predict the timing and direction of changes in interest rates. For those lucky soothsayers, the management of their banks’ investment portfolios has been easy, based as it is on the never-ending mantra of “rates are going up.” Since these managers “know” rates are going up, it then follows that only the foolhardy and uninformed would actually invest money before the rise occurs. That’s common sense, right? Well, to paraphrase Winston Churchill, never have so many been so wrong about so much. The fallacy of foregone conclusions. Since the Federal Open Market Committee of the Federal Reserve first took the fed funds target rate to its current, near-zero level in December 2008, it has been the opinion of more than a few portfolio managers that, simply because rates had reached such a low level, they had to go up, and soon. Even the Federal Deposit Insurance Corp. had a role in reinforcing this ruse with the publication of “Nowhere to Go but Up: Managing Interest Rate Risk in a Low-Rate Environment” in its Supervisory Insights publication. When that article was released in December 2009, the 10-year Treasury note was yielding over 3.5 percent. Now, more than five years later, the yield on the 10-year Treasury note languishes near 2 percent. It seems rates actually did have somewhere to go besides “up.” Dewey defeats Truman. So how did those “rates are going up” prophets fare with their singlefaceted prophesy? To be kind, it can be said their profits suffered. To be less kind, it can be said they couldn’t have been more wrong had they tried. The opportunity costs of maintaining ultra-high liquidity and limiting actual investments to the ultra-low yields of money-marketlike alternatives is surely painful for those oracles to contemplate. Replacing hope with action. Other portfolio managers, however, have not had to endure those painful sacrifices. These are the portfolio managers who did not try to convince themselves, and perhaps others, that they knew the timing and direction of changes in interest rates. These are the portfolio managers who had the self-discipline not to take the bait of a “sure thing” bet, like rising rates. These are the portfolio managers who avoided the trap of speculation. These are the portfolio managers with a strategy. Plan the work, work the plan. To be sure, there are always multiple, potential strategies, and there is never a guarantee that a single, chosen strategy will produce the most successful outcome. Conversely, not having a strategy will go a long way toward locking in unsuccessful outcomes; trying to outguess the market is not an effective strategy. For a community bank, the development and implementation of a successful, workable investment strategy involves more than simply accumulating the highest yields available. While income generation is an important element to consider, a bank portfolio needs to do more than provide coupons to clip. A portfolio’s risk profile, its potential depreciation, and its cash flow characteristics are some of the other considerations, besides yield, that go into making strategic plans. Managing a portfolio whose risk profile meshes well with other major About the Author Lester F. Murray, associate partner of The Baker Group, joined the firm in 1986. He previously worked for the Office of the Comptroller of the Currency as an assistant national bank examiner and is a frequent speaker at investment conferences and educational seminars. Murray is a graduate of Oklahoma State University. The author can be reached at 800-9372257, email: lester@gobaker.com. The Baker Group is a Diamond Associate Member of the Indiana Bankers Association and an IBA Preferred Service Provider. Speculation vs. Strategy: What Drives Your Investment Decisions?
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