Charitable Donation Account Frequently Asked Questions
We abide by the management philosophy of our owners – America’s Credit Unions – to act in the best interest of our clients while fulfilling our fiduciary duty as a trust company.
Similarly to credit union pension and employee benefit funding plans that include longer-term assets like equities in their investment portfolio to better match assets and liabilities, charitable giving is also a long-term initiative. The NCUA’s CDA Rule grants credit unions the ability to responsibly make the same investment choices to fund charitable giving strategies.
Responsibly incorporating lower correlation asset classes, like equities and corporate bonds, into the credit union’s existing investment portfolio can help reduce overall portfolio risk while improving ROA and funding charitable giving.
A credit union’s investment portfolio is subject to interest rate risk. Rising interest rates not only negatively affect bond prices but also increase extension risk to the credit union’s mortgage portfolio. The following chart shows the positive performance of equities (S&P 500) during periods of rising interest rates. The shaded areas represent rising 10-year U.S. treasury yields and the corresponding S&P 500 returns. It is clear that rising equity prices helped offset declining bond prices.
Overall risk is determined by the size of the investment relative to the credit union’s overall investment portfolio and the mix of equity to fixed income for the investment. The investment mix is based on each credit union’s specific situation and risk tolerance, which considers historical time periods and potential impacts to the income statement and focuses on downside risk. A more conservative mix will offer less volatility and downside risk but also lower long-term return potential. We work with each credit union individually to find the right mix of risk and return.
No. At the extremes, some strategies concentrate risks while attempting to maximize return while others focus solely on minimizing risk at the detriment of return. Our ETF Portfolio Advantage strategies have been recognized by both Forbes and Morningstar for our ability to manage both risk and return. We abide by the management philosophy of our owners – America’s Credit Unions – to act in the best interest of our clients while fulfilling our fiduciary duty as a trust company.
ETFs have the advantage of being low cost, transparent, liquid, and highly diversified. Using index ETFs as the building blocks for our portfolios helps to reduce volatility and minimize negative impact to the income statement during down periods in the market; individual stocks or actively managed mutual funds which can add to volatility.
Starting in 2019, GAAP requires all equity investments be accounted for using the Trading Security method. Under Trading Security method, all income, including dividends and interest, along with realized and unrealized capital gains are recorded on the income statement. This treatment has many benefits, including full recognition of long-term benefits and a simplified accounting process, but does require credit unions to recognize the short-term impacts of market declines. MTC has been managing our portfolio strategies for over 10 years and can show credit unions potential income statement impact during down periods. The benefit of these investments is that they are different from a credit unions traditional investment portfolio with higher return potential, but risks need to be managed and understood. Our use of ETFs and investment philosophy helps to reduce income statement risk in the short-term while retaining the contributions to ROA in the long-term.