Investment Portfolio Increases, Components Shift

Low interest rates have credit unions searching for new strategies for their money, resulting in significant shifts in the portfolio.

The low interest rate environment has brought about significant changes to credit unions’ investments. The portfolio is increasing, and credit unions are shifting not only where theyare investing but also the duration of those investments in order to boost their rate of return.

Investment Portfolio Composition
Data as of December 31, 2011
Source: Callahan & Associates’ Peer-To-Peer Software.

Through the fourth quarter of 2011, credit unions’ investment portfolios reached a new high of $348.5 billion, up 12.6% over 2010 levels. Almost every segment of the portfolio has posted double-digit increases or decreases, indicating credit unionsare re-aligning their investment strategies with broader balance sheet shifts. Government and agency securities remain the largest component of the investmentportfolio and balances increased $27.9 billion, or 18.0% from the previous year. Investments at banks and savings and loans have become the second-largest component of the investment portfolio (asidefrom cash on deposit), surpassing investments in corporate credit unions. These investments are up 4.1% to $44.6 billion, while funds held at corporate credit unions (includingcash deposited in corporate credit unions) are down 35.5% to $38.1 billion. All other investments, which include categories such as trading securities and held-to-maturitysecurities, declined 1.7%, the softest decline among any category.

Investment Portfolio Component Growth
Data as of December 31, 2011
Source: Callahan & Associates’ Peer-To-Peer Software.

More than half of the investment portfolio is now in holdings with maturities of more than one year. In order to receive a higher rate of return on investments, credit unions now have 53.9% of their portfolio in investments with more than one yearto maturity. This is up significantly from prior to the Great Recession. In 2006, credit unions only allocated 41.2% of their portfolio to these types of investments. Although credit unions are increasing their investment duration, investments withmaturities greater than 10 years have not significantly changed. Only 1.8% of the portfolio is held here, compared with 1.2% in 2006. The extra couple of years might be worth the higher return, but credit unions are not willing to lock up their moneyfor extreme lengths of time.

Thelow interest rate environmen is expected to continue through 2014. As credit unions continue searching for the best return for their money, they will likely keep shifting their investmentsto find it.

May 27, 2014

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