Councils continue search for returns despite interest rate cut delay

image by Andreas Poike, Flickr

Local authorities are still adjusting investment strategies following the EU referendum, despite the Bank of England’s decision not to cut interest rates.

The bank’s monetary policy committee this week voted eight to one to leave the UK’s headline interest rate at 0.5% despite expectations it might opt for a cut to 0.25%.

Alan Simkins, director of the Local Authority Division at investment firm King and Shaxson, told Room151 that he had seen increased interest in treasury bills since the Brexit vote.

He said: “Treasury bills represent a great opportunity to obtain short dated UK government debt at better levels than either the gilt market or the Debt Management Account Deposit facility.

“Investors in the gilt market would have to place funds out to five years in the gilt market – currently at 0.35% – purely to beat where one month yields cleared in last week’s Tbill tender, which was 0.34%.”

He added that he has seen a continuation of authorities locking into higher yields in the market for certificates of deposits.

He said: “Should yields fall further from the purchase date, authorities will own a higher yielding asset with good credit quality and liquidity.”

Short dated bonds are also proving popular in financial, corporate and covered names, for the same reason, he added.

He said: “The competition for these offers is obviously very high, especially with more locals adding bonds to their treasury management strategies, but we do see a lot of activity in this space.”

Dennis Gepp, managing director and chief investment officer, cash, at Federated Investors said that treasury investors had continued a move into the company’s Cash Plus fund.

The fund is similar to a money market fund but has a longer duration and next day – rather than same day – access.

Gepp said: “We have seen steady growth of the cash plus fund over the past couple of weeks.

In the past year and a half, it has gone up 35% and since the vote it has gone up just less than 10%. Having said that, we are talking about small numbers – it might sound a big rise but it just means it has gone from £642m to £693m.

“There hasn’t been a wholesale movement out of shorter length money market fund investments.”

He said that his firm’s larger clients are netting between 51 and 53 basis points from MMFs whereas the cash plus fund has been delivering between 78 and 80 basis points.

But he added that it is difficult to assess the exact role of Brexit in the rise of interest in the “cash plus” fund.

He said: “There are other factors. Some people who may have been putting slightly longer term money into a property fund might not be so keen to do so now.

“There has also been a fair bit of money released from Icelandic banks – if that was considered to be more sticky I wouldn’t be surprised to find its way to slightly longer-term investments like the cash plus fund.”

But local authority treasurers appear to be keeping their nerve in relation to property fund investments, following last week’s news that seven commercial property funds have suspended withdrawals in the wake of the Brexit vote.

John Kelly, from the CCLA, said that there had been no demand for withdrawals from its property fund.

He said: “The clients have behaved sensibly. In the presentation of our fund, we make it plain that there might be capital volatility but long term rewards from income flow are on offer.

“Occupier trends are strengthening and rents are going up. We are not officially forecasting anything but we would be very surprised if we didn’t continue to grow our income.”

He said that an initial valuation of property within the fund by BNP had made a fair market adjustment of just -4.3% on the value of the fund’s portfolio.

Mark Horsfield, director at treasury adviser Arlingclose, said the decision to hold interest rates meant there would be no change in its strategy recommendations, even with an expected cut now due in August.

He said: “It remains a lower for longer interest rate outlook with the balance of rate risk to the downside.”

But he added that the appointment of incoming prime minister Theresa May’s cabinet was of equal importance as the rates decision.

He said: “A radically changed Cabinet signalling a more accommodative fiscal economic policy than that which was in place yesterday may influence the extent of that monetary loosening in the future.”