The inestment portfolio is an important source of bank earnings as well as liquidity. In this difficult investment and lending environment, the need to manage book yield and risk is crucial. Given current market conditions, where rates have more room to rise than to fall, banks are finding value in outsourced investment management services. The outsourced solution could be for the entire portfolio or specific sectors, such as mortgage backed securities (“MBS”), asset-backed securities (“ABS”), municipals, or corporate bonds.
Most large institutional investors, such as insurance companies, pension funds, endowments and foundations, have chosen to outsource investment management to full-time professional managers as a response to increasingly larger and more complex financial markets.
In an environment where loan origination is sluggish, the investment portfolio is becoming a more important driver of earnings at the same time as bank management is facing lower yields accompanied by an influx of cash, and a more challenging regulatory regime. As a result, banks are interested in expanding into different market sectors such as MBS, ABS, municipals or corporate bonds, but are reluctant to take the risk without having the expertise in house. This is especially true given the recent change in regulations requiring that banks document their underwriting considerations for assuming credit risk in the investment portfolio beyond the reliance on public ratings. As part of its fiduciary responsibility as a professional asset manager, FPCM performs credit analysis on all of the individual names it eventually purchases on behalf of its bank clients, which it provides in order for the banks to meet these documentation requirements.
Banks are typically covered by brokers who sell them securities, often assuming the role of “advisor” to the bank on the portfolio. Unfortunately, their interests are not clearly aligned with the banks’ interests as they are compensated through sales commissions. Alternatively FPCM, acting as a registered investment advisor is a fiduciary paid by the bank to invest in the best long term interests of the bank, which includes minimizing transactions costs.
The assumption that the broker is “free”, and is therefore cheaper than hiring an asset manager, is simply not true. The form of payment is different, but the cost is comparable because FPCM is buying directly from larger primary dealers, while regional brokers who service community banks are marking up bonds that they purchase from those same primary dealers, or other wholesale dealers who purchase from primary dealers.
Within community banks, the investment portfolio is typically a part time job for the CEO or CFO. Senior managers may have the experience, but don’t always have the time to allocate to the investment process. When a bank retains FPCM, they are hiring a full time team of investment professionals, including portfolio managers, research analysts, and operations professionals who are focused on improving investment results on a daily basis.
Banks understand that access to information is important and most would agree that retaining a professional manager who is fully engaged in the information flow is critical to investment success. Moreover, banks themselves benefit from shared access to, and analysis of, that information. Often, renting that expertise and access is more efficient than building that capability in-house.
As a registered investment advisor, FPCM designs investment guidelines to meet the needs of individual client banks and manages separate, segregated account portfolios held at each bank’s preferred custodian. In such an arrangement, FPCM identifies securities and executes transactions. FPCM does not custody client cash and assets, and the bank is not obligated to enter into a long term contract with FPCM.
It is permissible for Banks to outsource the day-to-day investment management of the portfolio, but not the responsibility for that portfolio. This means the bank must understand the underlying investment strategy and associated risks, and maintain the appropriate documentation. FPCM provides bank clients with analysis and documentation to ensure that bank management has the appropriate information.
In addition to monthly and quarterly reporting, FPCM offers full online access to all securities positions, including valuation, risk and regulatory reporting information. These reports are exportable in Excel or Adobe “pdf” formats.