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Pre-Purchase Analysis Files Help Track Investment Performance

By Matthew Maggi

I love the mountains. Hiking, taking photos of the majestic peaks, being a part of nature makes me feel like I am a part of something larger than myself. Although I may be small in comparison to the mountain, I do not feel insignificant. Living in a city provides me with a similar feeling: I am a part of a larger community and have a role to play. When choosing fixed-income investments, each bond should have a purpose in helping you achieve your desired investment strategy: playing a role in the larger community of investments.

This does not mean each bond serves a unique purpose; the point of picking any investment may be the same as the last five. Yet, the investment supports the overall objectives, i.e., cash flow, rate of return, asset allocation, etc. Essentially, investment officers construct a team of investments that, when combined, achieve the desired outcome. When tracking the performance of investments, one proven way I have found to be helpful has been a simple one-page document that can be included in the pre-purchase analysis file.

Along with the usual identifying items like Committee on Uniform Securities Identification Procedures, settlement date, coupon, yield, maturity, duration or asset class, document the current rate environment, with specific comparison to the yields earned on fed funds, cash equivalents and other asset classes — this speaks to relative value. Documenting the “why” helps explain the reason a particular bond fits into the greater portfolio. It also helps answer any future questions from internal or external auditors or regulatory examiners.

One of the most commonly statements we hear from investment officers who have recently taken over an investment portfolio from a previous employee is: “I don’t know why this person picked this bond.” This type of document answers that statement, which is really questioning the decision. The rate environment changes so what may look like a poor choice in the current rate situation could have been justified when looking at the timeframe at point of purchase. Again, by documenting the decision-making process, one prepares to answer any future questions regarding this investment choice. Additionally, the investment officer can refresh his or her memory if the purchase took place several years ago.

If this record-keeping method seems daunting or unappealing, please do not let fear of making a mistake prevent you from being better at investing for your financial institution. None of us is perfect, but this document helps us feel confident in our ability to explain how an investment fits into our overall portfolio strategy.

Matthew Maggi is vice president in the Capital Markets Group at Commerce Bank in Kansas City. Matthew.Maggi@CommerceBank.com.

The opinions expressed herein are that of the author and not necessarily Commerce Bank or the Capital Markets Group (CMG). The information contained herein does not constitute a solicitation of an investment product or strategy. Investments in Securities are NOT FDIC Insured, NOT Bank-Guaranteed and May Lose Value. CMG is not acting as your ‘municipal advisor’ within the meaning of Section 15B of the Securities Exchange Act, and does not act in a fiduciary capacity.

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