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September 2015
17
Community Bankers Association of Illinois
Bank
notes
T
here are always some portfolio managers who have
convinced themselves, and perhaps others, that
they can predict the timing and direction of changes
in interest rates. For those lucky soothsayers, the
management of their banks’ investment portfolios has been
easy, based as it is on the never-ending mantra of “rates are
going up.” Since they “know” rates are going up, it then follows
that only the foolhardy and uninformed would actually invest
money before the rise occurs. That’s just common sense,
right? Well, to paraphrase Winston Churchill, never have so
many been so wrong about so much.
The Fallacy of Foregone Conclusions
Since the FOMC first took the fed funds target rate to its
current, near-zero level in December 2008, it has been the
opinion of more than a few portfolio managers that, simply
because rates had reached such a low level, they had to
go up, and soon. Even the FDIC had a role in reinforcing
this ruse with the publication of “Nowhere to Go but Up:
Managing Interest Rate Risk in a Low-Rate Environment” in
its
Supervisory Insights
publication. When that article was
released in December ’09, the 10-year Treasury note was
yielding over 3.50 percent. Now, more than five years later,
the yield on the 10-year Treasury note languishes near two
percent. It seems rates actually did have somewhere to go
besides “up.” Dewey defeats Truman.
So, how did those “rates are going up” prophets fare with
their single-faceted prophesy? To be kind, it can be said their
profits suffered. To be less kind, it can be said they couldn’t
have been more wrong had they tried. The opportunity
costs of maintaining ultra-high liquidity and limiting actual
investments to the ultra-low yields of money-market-like
alternatives is surely painful for those oracles to contemplate.
Replacing Hope with Action
Other portfolio managers, however, have not had to endure
those painful sacrifices. These are the portfolio managers
who did not try to convince themselves, and perhaps others,
that they knew the timing and direction of changes in interest
rates. These are the portfolio managers who had the self-
discipline not to take the bait of a “sure thing” bet, like rising
rates. These are the portfolio managers who avoided the
trap of speculation. These are the portfolio managers with
a strategy.
Plan the Work, Work the Plan
To be sure, there are always multiple, potential strategies,
and there is never a guarantee that one’s chosen strategy
will produce the most successful outcome. Conversely,
not having a strategy will go a long way towards locking in
unsuccessful outcomes; trying to outguess the market is not
an effective strategy.
For a community bank, the development and implementation
of a successful, workable investment strategy involves more
than just accumulating the highest yields available. While
income generation is an important element to consider, a
bank portfolio needs to do more than provide coupons to clip.
A portfolio’s risk profile, its potential depreciation, and its
Lester F. Murray, Associate Partner, THE BAKER GROUP LP, Oklahoma City, OK
What Drives Your Investment Decisions?
SPECULATION
vs
. STRATEGY
