Major Credit Union Mutual Funds Held Their Own in 2004, Credit Unions Can Expect Competitive Performances in 2005

MADISON, Wis. – Even though most people were looking for rising interest rates and a difficult stock market in early 2004 and those concerns were validated, their impact on MEMBERS Capital Advisors’ mutual funds didn’t hurt the high teens returns seen for the year. The nine funds, which are distributed by CUNA Brokerage Services, Inc., and are managed by MEMBERS Capital Advisors, the registered investment advisor affiliate of CUNA Mutual Group, saw strong performances in 2004, said Larry Halverson, senior vice president at MEMBERS Capital, which manages more than $8 billion in investments for credit union members, employees and the CU system. “The bond market did better than expected,” Halverson said. “Higher rates didn’t hurt stocks. We saw high, single-digit returns. In (a rising rate environment), our funds did well.” More than $800 million are invested in the nine MEMBERS funds, which were launched in 1997. There’s also an Ultra Series fund family which currently has $3.5 billion invested and has been around since the mid 1980s. For the top five MEMBERS funds, all had 2004 returns that for the most part, exceeded or were in line with the Dow Jones Industrial, NASDAQ and S&P 500, Halverson said. For instance, the MEMBERS Growth & Income fund had a 12.2% return compared to a 5.3% for the Dow, 9.2% for NASDAQ and 10.9% for the S&P 500. The MEMBERS Capital Appreciation fund saw a 8.6% return; MEMBERS Mid-Cap had a 15.4% return for 2004; the MEMBERS Multi-Cap Growth saw 12.9%; and the MEMBERS International Stock completed the year at 22.3%. Halverson said credit unions can expect to see more “persistent” interest rate rises, “but don’t expect runaway rates.” Profit margins may be difficult to maintain in 2005, he added. With stock markets at an all-time high, there will be an increase in labor costs, benefit costs and raw material costs. “We’re still calling for mid to upper single digits on stocks and expect to break even or do a little better than that on bonds,” Halverson said. “We can say that 2004 was a good example of when investors got very concerned and pulled out of stocks and bonds. It rarely pays to sit on the sidelines. You’re better off staying with it for the long term.” The Trust for Credit Unions (TCU) mutual funds are typically sought by credit unions looking for short-term investment opportunities with performance focused on different parts of the yield curve, said Chip Filson, president/CEO of Callahan & Associates, Inc. Callahan Financial Services, Inc. serves as a co-distributor of TCU along with Goldman, Sachs & Co. Callahan Financial Services, Inc. is the general partner of the Callahan Credit Union Financial Services Limited Partnership (CUFSLP). The three TCU funds have $2.3 billion invested in them. Credit unions have their choice of the TCU Money Market Portfolio; TCU Ultra-Short Duration Government Portfolio; and the TCU Short Duration Portfolio. In 2004, interest rates begin to rise after historically low levels, with the first Federal Reserve Board increase coming in June, noted Melanie El-Sabaawi, executive vice president for TCU. Overnight short rates rose 125 basis points, shortening the yield curve for three-month and two-year instruments. “For bond funds, it was somewhat of a mixed blessing,” El-Sabaawi said. “Higher interest rates meant long terms on the bonds. On the long yield, rates came down. At the beginning of 2004, the yield curve became flatter than it did at the end of the year. For the TCU Ultra Short fund, which is compared to the six-month and 12-month Treasury, it outperformed both funds, having a 1.76% return for 2004, El-Sabaawi said. It also did better than cash even during a rising rate environment. The TCU Short Duration fund goes out further and is stacked up against the two-year Treasury and had a 2.50% return for the year. “It outperformed the Treasury notes and significantly outperformed cash,” El-Sabaawi pointed out. The TCU Money Market fund, the granddaddy of the three, first offered in the late 1980s, “performed in line with the Fed Fund.” This year is poised to be a continuation of what was seen in 2004, El-Sabaawi noted. “You had accelerating loan growth in the credit union industry but share growth lagged behind,” she said. “A gap developed between how credit unions were taking in shares (which led to their) having to draw down their investments.” The yield curve changes in the first half of 2004 affected all credit union investments trying to fund higher loan growth, El-Sabaawi said. As a whole, credit unions drew down their investments from cash, cash equivalents and mutual funds. -