Pub. 2 2012-2013 Issue 5

14 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S Portfolio Management A s the year gets underway, it is important for portfolio managers to complete an evalu- ation of their portfolios – understanding the current earnings and cash flow risks, andmanaging the impact that a turn in the rate cycle would have on those same earnings and cash flows. There are four actions items to consider as we head into 2013: 1. Shorten your time horizon – It’s easy to get caught up in the thought that a Japan-like, 10-years scenario is in the works. While that certainly may be the case, it is imperative to manage to the most painful outcome for a portfolio. Right now, that outcome would be a sharp increase in rates. • Look at the price risk of individual holdings. Overall, portfolio price risk might be reasonable, but there are, undoubtedly, securities with material potential price volatility. Look at the table below, and use it as a benchmark when evaluating the price risk of individual holdings. Approximate Price Variability Given Rate Change US Treasuries +100 +200 +300 3 Yr -2.89% -5.67% -8.35% 5 Yr -4.77% -9.28% -13.56% 7 Yr -6.46% -12.47% -18.05% 10 Yr -8.66% -16.50% -23.59% In most cases, securities with more price risk will produce a higher yield. The question “Portfolio yields continue to roll lower and cash balances continue to increase, so earnings pressure is likely to increase as well. We are also one year closer to the end of this cycle, and the longer that the market remains in this mode, the more that portfolio risk increases.” FEATURE ARTICLE KARL SCHWAB CFA, Managing Director CantorFitzgerald