Playing to Win

Concentrate on defense and play conservatively? Get aggressive and air it out? In benchmarking and football, it is whether you win or lose and how you play the game.


The National Football League (NFL) has entered into its second season, the playoffs, where teams play intra-conference games for the right to represent their conference in the Super Bowl.  The winner of the Super Bowl is universally accepted as the very best, a team that sets the standard of excellence for the 31 other teams in the NFL. 

Similarly, credit unions that establish explicit investment benchmarks seek a standard of excellence.  However, for most credit unions, the benchmarking process is a little more complex – and a lot less bloody – than the NFL playoffs. 

The Goal Is Clear, but the Path Is Subjective

Consider the process of selecting a benchmark for actively managed investment portfolios. Here, the goal is straightforward: establish an appropriate standard to evaluate a portfolio manager’s performance. 

There are a variety of popular indices available to evaluate a manager’s performance.  Selecting the most appropriate benchmark requires careful consideration of a credit union’s investment strategy.  The basic dilemma is this: benchmarking is designed to measure how closely a portfolio tracks a chosen index, but in order to beat the benchmark, managers need to deviate from it. 

The benchmark selection process needs to account for the nature and scale of these deviations.  For example, a credit union that seeks to add value through sector rotation should have a different investment benchmark than a credit union adding value through duration management.    

Benchmarks can also create insight into future risk/reward expectations, answering the key question as to whether investors are being compensated for the risk they are assuming.

Balance Sheet Considerations

For credit unions seeking to benchmark their investment portfolios, balance sheet considerations add another dimension to the selection process – considerations beyond what a conventional portfolio manager would have to take into account.  For example, a credit union with 6 percent net worth ratio will likely have a different risk appetite than a credit union with 12 percent net worth, and its investment benchmarks should reflect the difference.

Jim Tolliver, CFA, Sr. Director, Financial Strategies Group Mid-States Corporate remarked recently on the similarities between the pursuit for the Super Bowl and the role of credit union investment portfolios and benchmarks:

While NFL teams strive to win the Super Bowl, the goal of credit unions is to be a consistent top performer.  We need to look at the investment portfolio as a player on the team, with a specific role it must play successfully in order for the team to succeed. For investment portfolios, that role is to complement liabilities, assets or capital.
Defining these needs in terms of a benchmark portfolio will help you draft your Super Bowl- caliber investment portfolio.

There is a great deal of expertise on the topic of investment benchmarks in both the natural person and corporate credit union system. To learn more about investment benchmarks, register for our upcoming webinar, Benchmarking Investment Portfolio Returns, brought to you by the Callahan Center for Credit Union Leadership.