One of the fundamental axioms of investing is diversification. The argument
for diversification is simple: portfolios with investments spread across different
asset classes and issuers can reduce their risk for a given level of return
when compared to non-diversified portfolios. Credit union investment managers
know the concepts, but the latest data from Callahans’s First Look shows
an increasing concentration in the corporate credit union system for investments.
Is it time for credit unions to look at their exposure in the corporate system?
Credit unions increased their cash position 21.5% in the first quarter of 04
compared to last year. Out of that increase, about 92% ended up in cash on deposit
in the corporate system. Total investments increased 5.1% for the first quarter
compared to last year, and a majority of that increase – 84% – landed
at the corporates. Money market portfolio managers in the capital markets have
as their objective one overriding goal: preservation of principal. Their primary
tool in meeting this objective is to monitor their exposure in one issuer, often
implemented as a 5% limit. Are the same standards being applied by credit unions
with respect to the corporates?
Other interesting data from First Look shows that the yield on investments
dropped 30 basis points (2.687% to 2.357%); while yield on loans decreased 43
basis points (6.52% to 6.09%). Fortunately, there was help on the funding side
of the balance sheet with the average cost of funds reduced from 2.017% to 1.69%.
First Look data includes 564 credit unions representing approximately 30% of
the industry with $181 billion in assets. The data compares last year’s
overall number to the first quarter 04.