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same for everyone. With the analytical tools available rates, portfolio managers know their efforts to create and
these days, portfolio managers can estimate with surpris- maintain a steady stream of stable cash flow will now be
ing accuracy the price volatility of individual items or an rewarded. This cash flow line-of-defense is beneficial in
entire portfolio. Having that ability doesn’t prevent price two ways. Its source represents a diminution, in the case
depreciation, but it does prevent it from being an unpleas- of amortizing securities, of assets with below-market val-
ant surprise, and that prevents a lot of hand-wringing. ues. These funds now become the transactional ammu-
nition with which to replace lower-yielding “underwa-
THE CASH FLOW DEFENSE. Once it is determined how ter” assets with higher-yielding, current-market bonds.
much market risk can be comfortably tolerated, the se- Depreciation is reduced and yield is increased. These are
curity selection process actually becomes simpler. Po- both good things, but they won’t happen unless care is
tential alternatives can now be evaluated in the con- taken to identify and acquire, along the way, the kinds of
text of predetermined depreciation parameters. You’ve securities that will provide this valuable, defensive cash
identified your pain threshold and can now apply your flow just when it is most needed. Remember what your
analytical techniques to measure what kind of expo- father told you: defense wins championships. H
sure your various alternatives might bring with them.
Those alternatives, whether they apply to broad strate- Lester Murray joined The Baker Group in 1986 and is an asso‑
gic options or individual security selections, can now be ciate partner within the firm’s Financial Strategies Group. He
judged on the basis of their contribution to, or mitiga- helps community financial institutions develop and implement
tion of, depreciation risk. investment and interest rate risk management strategies. Be‑
fore joining The Baker Group, he worked at two broker/deal‑
or those who have taken the steps that allow them er banks in Oklahoma City and was also an assistant nation‑
to be comfortable in their own risk, downturns al bank examiner. A graduate of Oklahoma State University,
F in the market do not induce panic. Rather than he holds bachelor of science degrees in finance and economics.
lament the price depreciation wrought by higher market Contact him at 800/937‑2257 or [email protected].

Artful

expertise.

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