What is the first step to developing a sound investment strategy for bond portfolio management? Here’s a hint: it doesn’t involve the Federal Reserve.
Welcome to Bond Investment Mentor! This is a podcast dedicated to helping community financial institutions master the art of fixed income investments. In this first episode, we'll start at the beginning with an introduction. I'll also discuss the first thing you should consider when it's time to make decisions about investment strategies for your portfolio.
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I'd love to hear from you. If you have questions that you'd like me to answer on the podcast, please send them to Chris @ BondInvestmentMentor.com.
If you're interested in more articles, tips and resources about fixed income investing and portfolio management, check out BondInvestmentMentor.com.
You can also connect with me on LinkedIn (Christopher Nelson CFA), Facebook (Bond Investment Mentor) and Twitter (@BondInvMentor). Let's catch up!
Chris Nelson: Bond Investment Mentor episode one. All right, let's do this!
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Chris Nelson: Hi there, welcome to Bond Investment Mentor! My name is Chris Nelson, and this is a podcast dedicated to helping community financial institutions master the art of fixed-income investments. If you're working for a community bank or credit union, and you have responsibilities for the investment portfolio, you've come to the right place. I'll be your personal investment guide as we help you boost your fixed-income investment knowledge, level up your portfolio management skills, and help you gain the know-how you need to help your institution achieve its financial goals.
In this episode, we'll start at the beginning with an introduction and some reasons about why I decided to launch this podcast. I'll also be discussing the first thing you should consider when it's time to make decisions about investment strategies for your portfolio. So, let's get started!
Well, hello there! I'm glad you're here. My name is Chris Nelson, and I'm excited to be spending some time with you as we explore fixed-income investments, portfolio management, and other related topics. My goal is to help you learn how to use your investment portfolio more effectively to help your financial institution meet its goals and optimize its performance.
So let me start with a little bit of background, my “origin story,” if you will. As Austin Powers put it, "allow myself to introduce myself." I've been involved in banking and investments for just over 29 years, nearly three decades doing this. I've held the Chartered Financial Analyst designation for 20 of those years, and I started out as an Investment Advisor and Portfolio Manager before moving over to banking.
For the last 19 and a half years, I've worked as Chief Investment Officer and Director of Finance and Treasury for a New England-based community bank. In addition to managing the bank's investment portfolio, my team was also responsible for supervising the bank's financial operations relating to liquidity and funds management, asset-liability and interest rate risk management, loan and deposit rate setting, hedging and derivative activities, and international services.
And over the past few years, one thing that's been really neat, I've been able to learn how to use the investment portfolio in conjunction with those other areas to help our bank manage its risk-reward profile. Now, in addition to doing the banking thing, for the last 12 years I've also been involved in teaching and training both as a college instructor at our local university and as an executive trainer for community bankers. I've spoken at national conferences, and I've worked at several banking schools around the country, which has been a lot of fun.
So enough about me. Why this podcast? Well, let's go back to the beginning when I first started managing the bank portfolio. I wanted to learn more about the investments I was handling and learn to be a better Portfolio Manager. But as I checked, I really didn't have a lot of options for information and places to go to learn things. And it's not just me. I've heard this frequently from other community bankers over the years. Some bankers told me that, you know, the last time they touched some of this material was in a college finance course.
And brokers are a resource, and I've used them over the years myself. But some people have said to me that they're concerned about the objectivity on the information that they're getting. I had one banker say to me, you know, I'm wondering if what they're telling me is what I need to know so that they can sell me a bond.
Now, don't get me wrong, brokers are a great resource. I have wonderful relationships with the brokers I work with. And in a future episode, I'll actually talk about broker selection and cultivating those relationships. But I know it can be difficult as you're getting the information, wondering if there's an agenda behind the information that you're getting.
So that's one of the reasons that I created this podcast. I wanted it to be an objective resource and one that I wish I had had when I was first getting started. I want to be able to share my nearly 30 years of experiences, knowledge, stories, and even the mistakes I've made with you to help you be better at what you do as you move forward with your journey.
So, some of what we'll be covering in the podcast will be certainly fixed-income securities. We'll talk about the characteristics and risks of different types of investments. And those things will include government bonds and tax-exempt municipal bonds. We'll touch on mortgage-backed securities, both residential and commercial, CMOs, of course, collateralized mortgage obligations, and we'll discuss other fixed-income types as well, like SBA floaters, corporate bonds, etc. We'll also talk about various portfolio management topics, not just the portfolio itself, but how to combine portfolio management with other balance sheet strategies to generate a better return and or manage your risks.
In addition, there'll be plenty of discussion about the capital markets. We'll be discussing the Fed - I guess that's kind of important - interest rates, the bond markets, economic news that has relevance to what we do with our portfolios. And we'll touch on other topics as well, including asset-liability and interest rate risk management, liquidity risk management, using derivatives; who knows what we'll touch on.
The other thing we will do on the podcast, I'll be answering your questions, and I would encourage you if you have questions to please send them to me at chris@bondinvestmentmentor.com. And who knows, you might hear one on a future episode here down the road.
So let's get started with this week's topic, which I've titled “First Things First.” One of the things that I've seen when I've talked with others over the years, I get a lot of the same types of questions, and some of them go like this. What do you think will happen with interest rates? What is the Fed going to do and when? You know, what should we do as a result of what we're hearing about with the Federal Reserve and rate changes, and so forth?
And questions like this, I found, have become more prevalent recently, given the potential uncertainties in the U. S. economy in the bond markets and, of course, the Fed’s been a little busy of late cutting interest rates. So, as a result, your investment portfolio might be getting a little more attention right now as investment committees and asset-liability committees discuss how to position the portfolio for what is expected to be declining interest rates, at least for right now. And with the constant drumbeat about interest rates from the financial media and regulators, it gets really easy to start planning an investment strategy from that perspective.
But here's the thing - spoiler alert - that is not the first thing that you need to do. When it comes to bond portfolio management, it's important to start out by assessing the current balance sheet position of your financial institution and the risks that are contained in it and not base your strategy or decision-making on an interest rate bet. It can be really easy to get sucked into an interest rate discussion and start with that. But what you need to focus on is your risk exposures first, and then go from there.
Why is that important? Well, here are four reasons for why I think this is a good first step. Reason number one is that forecasts and expectations are not always correct. I don't know how many times I've seen various expectations and interest rate forecasts totally go by the boards because, frankly, they were wrong. It was just less than a year ago that we were expecting interest rates to continue rising, and all of a sudden, we found ourselves in a declining rate environment during the course of this past year.
I can recall a few years ago, where the expectation was no change by the Federal Reserve in terms of interest rates, and in a matter of about two and a half weeks, we went from no expectation to rising interest rates. That's how fast these things can change. So, making a decision based on a forecast on our interest rate expectation isn't always going to pan out for you if you start positioning the portfolio, and it turns out that those forecasts were wrong.
Reason number two is that the investment portfolio is an important tool for managing your balance sheet. As I said, the focus is on what's happening on your balance sheet first. And when it comes to your balance sheet, it's not just about loans and deposits. You can use the investment portfolio to help hedge risks that are contained within your balance sheet. For example, if your balance sheet is loaded with a lot of longer-term loans, and you want to try to change that mix a little bit, you can use your investment portfolio and blend it together to get the asset mix that you desire.
In addition, the investment portfolio is important from a liquidity management perspective in terms of your balance sheet, not just for potential bond liquidations. There are other means that you can use to manage liquidity, and we'll touch on that in a future episode as well.
Reason number three for why you should start out by assessing your current balance sheet position and not making an interest rate bet: not all balance sheets have the same risks. And here we're talking about interest rate risk. Some balance sheets are what are known as asset-sensitive. And what that means is when interest rates change, the asset side of your balance sheet is going to reprice more quickly. Other institutions are liability-sensitive. That means that when interest rates change, it's the liability side of the balance sheet that's going to reprice more quickly.
As a result, what you might need in your investment portfolio will likely vary from other financial institutions. This isn't a “one solution fits all types” situation. The key is not in understanding what interest rates might do but how they will affect your balance sheet and your bank's financial performance. So it's important to keep that in mind and look at what's happening at your institution first and foremost.
And finally, reason number four: your overall risk appetite may vary. I saw a report recently from Ernst and Young that was discussing the importance of a company understanding its risk appetite. And one of the things it said was that a company needs to know how much risk it is willing to take and how it wants to balance risks and opportunities. What I found is that your institution's risk appetite is going to be something that is unique to your organization.
An institution with a lower overall risk appetite might decide to hold more conservative securities, for example, as an offset to higher risk levels in the loan portfolio. Another institution might decide that it's okay to invest in riskier investments, given their ability to accept and consider additional risk on their balance sheet. So, depending on the overall risk appetite for your institution, that's going to determine some of the decision-making that goes into how you begin to put your portfolio together.
Now, as I went through all of these reasons, there was very little discussion about interest rates. Now, does this mean that you should ignore interest rates, or you should just not pay attention to the actions and comments coming from the Federal Reserve? Of course not. As the 800-pound gorilla in the capital markets and the keepers of monetary policy, we still need to pay attention to what Fed Chair Jay Powell and other Fed representatives have to say. Interest rates are a factor. It's just not the first thing to think about. What I think is important is taking into consideration your balance sheet and the risks it already contains. That should be your first stop on the road to effective bond portfolio management.
Well, that's going to wrap things up for today. Thank you so much for tuning in. If you liked what you've heard, here are three ways you can kind of help spread the word. First of all, subscribe to the podcast, so you don't miss an episode. You'll be able to find it on Apple Podcasts, Google Podcasts, Spotify, Stitcher, and wherever fine podcasts are sold.
The second thing is to leave a review. Please be honest; that will help others just learn about the podcast. The third thing is that you can share this episode with others that might be interested. If you know someone that could benefit from what I'm sharing here today, please feel free to share this episode. My goal is to help community financial institutions everywhere. If you have questions or comments, please email me at chris@bondinvestmentmentor.com. I will be answering your questions on future episodes, as I mentioned earlier. Also, if you have topic ideas that you'd like to hear covered here on the podcast, please pass those along as well. I'd love to hear from you!
If you're looking for more information, please check out the website bondinvestmentmentor.com, where you'll find articles, tips, and resources that will help you do what you need to do with the investment portfolio.
You can also connect with me on the socials. On LinkedIn, you'll find me at Christopher Nelson CFA, on Facebook at Bond Investment Mentor and on Twitter at @BondInvMentor. I look forward to catching up with you soon! Thanks again for stopping by. Have a good one!
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