Can alternative investments make credit union boards and CEOs less stressed?

Mark Axmacher

May 1, 2024

New accounting rules for credit unions dictate that they must record losses in their investment accounts as a loss on their Profit and Loss statements monthly. That can be incredibly stressful on a credit union board if they have investment accounts that are heavily correlated with the publicly traded stock market—which has been volatile over the last several years.

The stock market can be quite volatile, and, in my opinion, the large surge of retail investors and the ease of getting started in investing via apps over the last several years, can make the public markets even more volatile. Mix that with the second-by-second news reporting, and any random event might be the reason why your stocks fall significantly in a day, week, or month.

The S&P 500 had 7 down months in 2022 and 5 down months in 2023. That means one out of the last two years credit unions had to write a loss on their P&L (assuming they were invested solely in an S&P 500 fund for this example).

Alternative, non-market correlated, asset classes and investments can reduce overall portfolio volatility, having a hedging impact on the monthly P&L of a credit union. If an investment is outside the public stock market and doesn’t move in the same way, then the daily swings of the market will have less of an effect on the overall portfolio of the credit union, better enabling them to write a potential profit on their P&L per the new accounting rules.

To bring back the S&P 500 example, conversely, during the same time, we have seen credit union accounts that had positive performance in 24 out of the last 24 months, in large part due to the use of non-market correlated investments.

More specifically, private equity and private credit are two alternative asset classes that can have as low as a 0.06% correlation to the public stock market. The scale goes from 1 to -1, where 1 means an investment is 100% correlated (moves in the exact same way) and -1 means an investment will be the exact opposite of the public stock market. Given some of these investments are near a 0% correlation, they pretty much ignore the reactivity of the public stock market.

At a credit union, liquidity is key. One may be thinking, “I can’t commit $10 million to a private equity fund or a private credit fund because 1) my credit union doesn’t have that large of an otherwise impermissible investment pool and/or 2) my credit union can’t afford to lock up an investment for X years, which is typical of a private equity and/or credit fund.” Luckily, in the past several years, Interval Funds offer a unique way to access these types of investments without the restrictive investment minimums and long lock up periods that often keep smaller investors or investors with liquidity needs, out of these asset classes. Interval funds offer quarterly liquidity, meaning that one day per quarter investors in these funds are allowed to liquidate their positions, and they can often be held in the same account as the investor’s public market securities. This structure also provides concise and easy reporting each month and quarter for the credit union executives and board.

In addition, over the last several years private equity and private credit have performed favorably, which could significantly contribute to helping a credit union further its goals, recruit and retain key employees, and grow its investment base. It is also seamless to take quarterly distributions from these interval funds, enabling a credit union to reallocate those dollars towards other projects or additional employee benefits.

We’ve found that the credit unions we work with in building an investment portfolio equipped with non-market correlated asset classes have been significantly less stressed about the newest rules regarding mark to market accounting rules and reporting profits and losses of their investment returns.

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