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By Trust for Credit Unions Mutual Funds
Credit unions typically make pricing and investing decisions using yield as the single performance indicator. Yield is the amount earned and booked from an earning asset or the amount paid on savings. This is how credit unions recognize income and record cost of funds, also called funding liabilities.
The chart below illustrates this measure of investment performance using four credit union segments over the past five years.
These lines, however, do not provide the full economic profile of the total performance of these portfolios. In cases such as these, total return more accurately reflects total performance.
Total return measures both the income from an asset as well as changes in its market value. It helps credit unions answer: Is the loan or investment recorded at par on the balance sheet still worth that value if the transaction occurred today?
This tracking of total value is one of the outputs of most ALM models that project a credit union’s net economic value (NEV) into the future based on changes in interest rate or other market-changing events.
The investment portfolio is an area of the balance sheet that potentially benefits the most from tracking total return performance. Credit unions can actively buy and sell assets, but even with a buy-and-hold investment strategy, total return fully reveals the cumulative economic impact of individual security decisions over time at monthly, quarterly, and annual reporting intervals.
Tracking total return quickly nets out the individual security fluctuations into one easily tracked portfolio measure. Credit union investment managers make most individual investment decisions at one time, the time of purchase, and usually with the intent to hold the investment to maturity. The decision making is not often reevaluated. The original assumptions are not usually reviewed. If an investment manager must change a portfolio’s outcome, they primarily do so at the margin with the next security purchase. They rarely update prior decisions according to the new circumstances.
Tracking total return provides multiple insights for ongoing portfolio performance management decisions, including:
Total return is not the only measure for investment portfolio management, but without this indicator, credit unions might not be making fully informed or performance-optimized investment and balance sheet decisions.
Any security, or portfolio, can calculate total return with the right analytics and market data. However, mutual funds are one class of securities that must, by regulation, report this information monthly for year-to-date, trailing 12 months, past three years and prior five years.
Credit unions are authorized to use mutual funds for investing when the portfolios are limited to securities authorized by the Federal Credit Union Act. These funds report a monthly distribution that is recorded as income but also calculates performance based on any changes in the underlying portfolio’s market value — the total return.
One example of this asset class is the Trust for Credit Unions’ family of mutual funds, which began 25 years ago by a group of leading credit unions. This $1.1 billion fund family recently reported the total return on its three portfolios for 2011. Both investors and non-investors can use this information to evaluate their own investment decisions and future options.
Mutual funds’ investment policies are established in the prospectus. These policies present the funds’ investment objectives, such as the duration target of the portfolio, the authorized investment securities, the fund’s performance benchmarks, and expenses.
This reporting is a good model for credit unions to use in their own portfolio and risk management, as total return is the key mutual fund reporting and performance monitoring. This tool should be a part of every credit union’s 2012 investment performance analytics.
The Trust for Credit Unions (TCU) is a family of institutional mutual funds offered exclusively to credit unions. Callahan Financial Services is a wholly owned subsidiary of Callahan & Associates and is the distributor of the TCU mutual funds. Goldman Sachs Asset Management is the advisor of the TCU mutual funds. To obtain a prospectus that contains detailed fund information including investment policies, risk considerations, charges, and expenses, call Callahan Financial Services, Inc. at 800-CFS-5678. Please read the prospectus carefully before investing or sending money. Units of the Trust portfolios are not endorsed by, insured by, obligations of, or otherwise supported by the U.S. Government, the NCUSIF, the NCUA, or any other governmental agency. An investment in the portfolios involves risk including possible loss of principal.
This sponsored content article is provided to the credit union community for shared insights and knowledge from a recognized solutions provider in the industry. Please note that the views and opinions offered here do not reflect those of Callahan & Associates, and Callahan does not endorse vendors or the solutions they offer.
If you are interested in contributing an article on CreditUnions.com, please contact our Callahan Media team at firstname.lastname@example.org or 1-800-446-7453.
January 25, 2012
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