Page 12 - 638271 IBAT with links for Flip Book_v3

Can Your Portfolio Play

Defense, Too?

LESTER MURRAY

HETHER WE LIKE IT OR NOT, THERE ARE SOME IMMUTABLE TRUTHS in this fickle world
of ours that simply can’t be denied. Like water running downhill. Or the way it
W always rains the day after you wash the car. When it comes to the bank’s investment
portfolio, the immutable truth we’re all living with these days is the inverse relationship between
interest rates and bond prices. When interest rates rise, bond prices fall. Water runs downhill.
Nobody likes it, but some are better prepared for it than others.

With the Fed having already instituted a
handful of rate hikes and the prospect for a
few more almost a certainty, portfolio manag-
ers are seeing the value of their holdings de-
cline as, for some, the level of market value
depreciation becomes uncomfortably
Rather than lament high. For some, perhaps—but not nec-
essarily for all. No one enjoys watch-
the price depreciation ing the value of their assets decline,
wrought by higher but market risk is, and always has
market rates, portfolio been, an element of portfolio man-
agement. Not even the most prudent HOW MUCH RISK IS TOO MUCH? Other portfolio
managers know their and savvy of portfolio managers are managers—and boards of directors for that
efforts to create and immune from market risk, and if your matter—seem a lot less stressed out by ris-
maintain a steady stream bank has a bond portfolio, it has ex- ing rates and falling values. Does that mean
posure to market risk. they’re happy about their bonds being under-
of stable cash flow will Why is it, then, that declines in water? Probably not, but they also know it’s not
now be rewarded. valuations are so often accompanied the end of the world. They know that because,
by consternation and hand-wringing? as part of their portfolio management process,
Banks buy securities in order to have earning they gave some thought to their portfolios’ role
assets, and whether securities have an unreal- and along with that, their own appetite for risk.
ized gain or an unrealized loss, they are still Are they all loaned-up and just need a li-
assets and they are still earning. quidity buffer or a temporary parking place
Problems seem to arise for those portfolio until loans are funded? Or is loan demand
managers who discover that somewhere along weak and investments are required to be pri-
the way, they became speculators and are dis- mary income generators? Does the bank have
mayed when they learn, often the hard way, large volumes of public deposits that require
that they somehow missed the top. Or maybe certain types of securities for collateral? How
they missed the bottom, or whatever it is they well is the bank capitalized and what other in-
“knew” was going to happen. Perhaps blinded terest rate risk exposure is present? Is asset
by shiny yields, their security selection pro- quality an issue?
cess failed to identify undesirable characteris- The result of such introspection will hope-
tics, like cash-flow volatility, that can acceler- fully help answer a key question: How much
ate price depreciation in the face of rising rates. risk is right for my bank? The answer is not the

The Baker Group is one of the nation’s largest independently owned securities firms specializing in
investment portfolio management for community financial institutions. Since 1979, it has helped clients
improve decision-making, manage interest rate risk and maximize investment portfolio performance.

12 | THE TEXAS INDEPENDENT BANKER