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The Ladder Investment Strategy

The core of any credit union’s investment portfolio is cash. Meeting member liquidity needs is the number one priority. Beyond this immediate liquidity need is a credit union’s investable funds, that chunk of your portfolio that can be invested in maturities from one month to five years or possibly longer. This investment portfolio can be further allocated based on risk and return, but the base strategy is usually the ladder.

A bond ladder, or ladder of maturities, spreads the maturity of securities held for liquidity purposes evenly throughout a given period. The ladder is created by investing equal amounts with monthly or quarterly maturities out to your desired maximum maturity. If, for example, you have a three-year monthly ladder, when your securities mature every month, you would invest that principal back into the ladder with a security maturing in three years. One way of conceptualizing the ladder is as a conveyor belt. Investments move along the conveyor belt toward their maturity date; when they reach the end of the line (maturity), the funds are placed back on the conveyor belt at the beginning (three years) if they are not needed for liquidity purposes.

6-18 Month Ladder

Credit unions benefit from using the ladder strategy because it provides consistent liquidity, helps limit interest rate risk, and is easy to build and maintain.

Providing consistent liquidity is a great benefit of the ladder strategy for credit unions. If you set up a monthly ladder, then you have the same amount of funds maturing every month. When those funds mature the portfolio manager makes a choice between reinvesting that principal back at the end of the ladder or instead, using those funds for immediate liquidity needs. The flexibility and easy liquidity planning that the ladder strategy offers is great for credit unions.

The ladder strategy also helps limit interest rate risk. This is accomplished with the consistent reinvestment of equal dollar amounts occurring over time. If a credit union uses a two-year ladder with monthly maturities, then they will be reinvesting the same amount every month. These reinvestments will be made at the current interest rates for a two-year investment. In some months, interest rates will be higher, and in other months, rates will be lower. However, the  consistent investment amounts will dollar cost average the rates across the ladder. Therefore, ladders will give average performance in both falling and rising interest rate environments because of the passive nature of this dollar cost averaging. When interest rates fall, the ladder outperforms money markets that will adjust quickly to the lower rates; and when rates rise, the ladder outperforms longer term fixed investments because of the consistent reinvestment at the higher rates. The benefit is average performance without the risk of trying to time interest rate movements. However, if a credit union portfolio manager feels a bias toward the future direction of interest rates, the ladder can be easily shortened or lengthened to take advantage of the opportunity without a complete reallocation.

The ease of implementation and maintenance of a ladder is another benefit for credit unions. A portfolio manager only needs to determine how much to invest, the maximum maturity, and the frequency of maturity. After the portfolio has been built, it is easy to maintain. Investing in the ladder can become a part of a portfolio manager’s monthly duties. Ladders are best implemented with bullet maturity securities with a set maturity date. However, some credit unions also use some callable securities when it is likely that interest rates will rise in the future.

The ladder strategy is often utilized for the base of a credit union’s investment portfolio. The many benefits of a ladder included providing consistent liquidity, limiting interest rate risk, the passive nature and flexibility, and ease of implementation and maintenance. To learn more about the ladder and other investment strategies that may work for your credit union, please contact your Business Development Officer at (877) 786-2677.

Charlie Watts
Sales and Marketing Manager – SunCorp
FINRA CRD #3125484

All securities are offered through CU Investment Solutions, Inc.(ISI). The home office of ISI is located at 9701 Renner Blvd., Suite 350, Lenexa, KS 66219. ISI is registered with the Securities and Exchange Commission (SEC) as a broker-dealer under the Securities Exchange Act of 1934. ISI also is registered in the state of Kansas as an investment advisor. Member of FINRA and SIPC. All investments carry risk; please speak with your representative to gain a full understanding of said risks. Securities offered by ISI are not insured by the FDIC or NCUSIF and may lose value. All opinions, prices and yields are subject to change without notice.

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