Pub. 9 2020 Issue 3

The CommunityBanker 10 F E A T U R E By Jim Reber A s the calendar turns to the fall, millions of Ameri- cans gear up for their favorite sport of football. Of course, with this being a year unlike any other, we’re still trying to figure out what it will look like. Nonetheless, what better way to usher in the new football season than to relate standard gridiron phraseology to its investment portfolio equivalent? Some of this may sound like a stretch for the sticks, but perhaps you can find a loose ball in the pileup. If so, hopefully, you can convert the takeaway into a visit to the sweet land of six. Weight room Many footballers prepare themselves for the season with frequent trips to the gym. There, they can make good use of barbells. Community bankers often utilize “barbells” to hedge their bets against rate movements. This strategy simply entails buying roughly equal amounts of very short-duration bonds and long-duration bonds. The definitions of “short” and “long” will vary from buyer to buyer, but in the end, the investor is going to be pleased with at least half of the holdings, regardless of whether rates rise or fall. Run-pass option This recent innovation of play-calling gives the quarterback the ability to decide on the fly whether to run the ball or throw downfield. In a similar sense, investors can do the same with a do-it-yourself floater. Most municipal bonds in community bank portfolios have a longer-than-average duration. Often, that is precisely the intention of the portfolio manager, as it may sync with the bank’s interest rate risk posture. However, sometimes the manager decides the portfolio is more extended than desired, in which case the DIY is called. This entails the execution of a pay-fixed interest rate swap to turn the asset into a receive-floating adjustable rate bond. Lockdown corner T he best way to explain this is to lift the definition from Wikipedia: “These elite defenders cover an offensive receiver so effectively on either side of the field that the quarterback Kickoff! A Football Fan’s Guide To Portfolio Management