Peer Performance Sheds Light on Investment Results

A multi-faceted benchmarking process can help credit unions extract more value from their investment portfolios

 
 

Many credit unions today don’t measure their investment results with the same thoroughness that they apply to measuring core credit union activities like lending and deposit growth. But benchmarking investment results can provide insight into how well the credit union is capitalizing on even small opportunities to add value for members.

There are two main categories of benchmarks: market benchmarks (such as indexes or securities) and peer benchmarks. Peer benchmarks help credit unions assess their results compared to credit unions with similar investment portfolios. Peer benchmarking can create opportunities for credit unions to learn from each other.

Estimating Total Return

It is interesting to note how credit unions’ investment results compare using data provided by the 5300 report. To estimate total return using the 5300, the formula would look like:


Investment Income + Change in FAS 115 + Realized Gain & Loss
______________________________________________________

Average Investments for the Period

We calculated the investment total return for all credit unions greater than $250 million in assets, and then segmented those results by the size of the investment portfolio with the following results:

Generally speaking, the bigger the investment portfolio, the higher the total return, with outlier results on both ends.

Assessing Portfolio Strategy

Measuring results compared to other credit unions with similarly sized portfolios is a start, but narrowing the comparison to those with a similar investment strategy would sharpen the comparison. Investment portfolio composition is a publicly available indication of investment strategy.

As the table below shows, portfolio strategy does tend to change as the investment portfolio gets bigger:

Size of investment portfolio

US Govt. Obligations

Fed. Agency Securities

Mutual Funds

Corporate CUs

Banks/S&Ls

Other

Cash & Equiv

 

 

 

 

 

 

 

 

Under 50MM

0.7%

9.6%

0.5%

17.0%

40.2%

5.1%

26.9%

50-100MM

1.3%

29.8%

0.5%

15.3%

23.9%

5.3%

24.0%

100-150MM

0.3%

38.7%

0.6%

16.9%

16.1%

3. 6%

24.6%

150-250MM

1.1%

51.7%

0.5%

13.5%

8.0%

3.5%

21.8%

250-500MM

2.1%

50.8%

0.7%

17.2%

4.6%

3.4%

21.5%

500MM-1B

2.3%

60.1%

1.4%

12.4%

1.7%

4.3%

17.7%

1B Plus

0.5%

51.8%

1.5%

17.0%

1.3%

6.2%

21.6%

data as of 6/30/05

The information above demonstrates one way to construct a peer benchmark: select a group of industry peers and segment them by size and investment strategy. This methodology is far from complete however, due to the use of simple averages and incomplete data regarding the exact risk-adjusted profile of the portfolio.

To augment the benchmarking process, you should consider a market benchmark in addition to the peer benchmark. The market benchmark should be something you could invest in as an alternative to your portfolio, such as the two-year Treasury or a corporate certificate. Taken in tandem, the market and peer benchmarks given a more complete understanding of how the portfolio is performing.

 

 

 

Nov. 7, 2005


Comments

 
 
 
  • Good job going behind the numbers.
    Anonymous
     
     
     
  • Segmentation based on portfolio size and asset allocation is an appropriate strategy, however performance insights could be improved with addition of thoughtful Skins analysis.
    Anonymous