Councils need to adjust their treasury management strategies to enable them to consider longer term investments, according to sector experts.
Room151’s recent annual investment survey of council treasurers revealed that 50% of the 120 authorities surveyed have some money out for a period of one to three years, while 35% have identified treasury investments they will not need to touch for three to five years.
Roughly 28% of councils surveyed said they had at least some investments out with a time horizon longer than five years, with some councils earmarking as much as 30% of their portfolios for over five years.
In a wide ranging discussion on investment at last week’s Local Authority Treasurers Investment Forum (LATIF), David Green, client director at adviser Arlingclose, said that councils changing their attitude to cash would be a “slow move”.
He said: “Increasingly people are realising rates will be lower for longer, so cash is less appropriate if money is going to be there for many years.
“A lot of people said, ‘We are going to keep money short in case we are going to spend it. We probably won’t spend it but you never know, because If we had to borrow money that would be awful.’”
However, he argued such logic is now out-of-date because of the low cost of borrowing.
Green said: “I have seen some authorities borrowing from one another at 0.14%. Now, if you invest too much money and invest for too long and need it unexpectedly in six months’ time, there is no penalty for that. You can borrow somewhere else so cheaply.”
He added that the only thing that would speed the process of councils moving treasury investments to longer durations would be a bank failure. Richard Harbord, former chief executive of Boston Borough Council, struck a contrary note saying he expected the pendulum to swing back towards holding cash.
He said: “My view is that some of the £2.5bn invested in commercial property will go wrong, DCLG will distance itself from the whole thing and the Treasury will say you should never have got into it and we will be back to having mainly just cash.”
Roy Nolan, head of public sector liaison at broker RP Martin, told delegates: “You do have to do things differently and maximise your options with regard to cash.”
He said that the continuing low rate environment, along with a changing regulatory environment, should be prompting councils to change their approach to treasury investments.
He said: “Are treasury strategies fit for purpose? We have got a regulatory reboot, MiFiD, and changes to regulatory codes. It is all change. This is a great opportunity to take a fresh look.
“You need to make sure what is in your counterparty guidance, specified and non-specified aspects of treasury management, give you the flexibility to invest in things.”