Treasurers make ‘slow’ adjustment to asset allocation

Bank of England. Photo: Bank of England, Flickr

Survey results tell a tale of treasurers slowly adjusting asset allocation, low levels of yield and the possibility of rising interest rates

Are treasury officers adjusting their asset allocation in response to the current economic times? It seems they may, be tentatively, according to a survey.

The Room151 / CCLA Treasury Investment and Current Affairs survey reveals making noticeable adjustments in their asset allocation.

‘Challenge’

Presented by John Kelly, client investments director at CCLA, during the Room151 Local Authority Treasurers’ Investment Forum (LATIF), the poll shows 14% of officers “somewhat” increasing allocations to property funds (14%) and 15% to multi-asset funds. And as if underscoring their burgeoning popularity, few treasurers said they would cut allocations to these sectors.

Meanwhile, allocations to other local authorities are set to increase somewhat at 23% of councils, although that is balanced by 18% of treasurers saying they would slightly drop their allocations to councils.

Money market funds and bank deposit allocations are also on the rise, but these two are countered by similar numbers saying they would reduce their investments in those categories.

With no standout changes in investment thinking revealed by the sector it seems treasurers are still feeling their way through the economy. “The answer is that portfolios are changing, but they are changing at a relatively slow rate,” said Kelly.

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Treasury officers may be tentative about drastically redirecting their funds because it is hard to see where the growth might come from after a period in which returns have been modest to say the least. Only around a quarter (27%) of treasurers earned 1% or more on their funds. For everyone else earnings were low. Around 23% made just 0.25% or less, while 24% made up to 0.5%. In all, 75% of treasurers revealed that their yield was under the one percent mark.

The figures offers treasurers much to mull over as they consider their next move. “It’s fair to say,” said Kelly, “that looking broadly across the industry, there were very few who managed to match an inflation rate currently at 3%, on its way to 4% before the end of the year.

“Most of the funds lost real value over the year. That’s a challenge we need to think about.”

‘Sensible’

The survey results may speak of an issue with the general approach to treasury investments. According to Luke Webster, chief investment officer at the Greater London Authority, the common view of risk among local authorities may not be helping returns.

“I think everybody would agree in the context of treasury management you never want to be putting capital at risk in a meaningful way. So, you don’t want to be investing in things that are likely to default, or a portfolio of things where there is a strong likelihood of a net loss.

“But that doesn’t mean you should be obsessed that every investment preserves capital value at all times on an accounting basis.”

Webster said that in aggregate local authorities have around £30bn in reserves that “just doesn’t move”. Investing in a “more sensible manner” could release hundreds of millions of pounds for extra spending on essential services.

Treasurers revealed pessimism about the value of treasury assets under management. More than half of those polled, 51%, believe they will “fall somewhat” while almost 10% believe they will fall “substantially”. Close to a third, 31%, believe they will remain the same while only around 8% see values rising to any degree.

Inflation is on the rise to such an extent there is speculation that the Bank of England will raise interest rates. About 75% of treasurers reckon it will remain at 2% or less, while around one fifth believe they will rise anywhere between 2% and 5%. More challenging times ahead for treasurers.

Bank of England. Photo: Bank of England, Flickr

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