Treasurers need elected members to focus on risk

A small group of local authority finance officers gathered yesterday with Room151 and our London & South-East Think Tank host, J.P. Morgan Asset Management, to explore current challenges in the treasury office.

Observing the Chatham House Rule, we thrashed out themes from alternative investments for core cash to the biggest perceived risks facing local authority capital today. A recurring theme, worthy of some reflection, was the crucial role members can play in supporting (or not) their officers in developing and implementing a strategy for a secure treasury portfolio with a meaningful yield.

One thing was clear: we were not discussing a level playing field. There are councils with members from finance backgrounds for whom investment risk is meat and drink and there are those whose politicians need guidance every step of the way. Guidance though, is only part of it. Arguably there are members who hold deeply entrenched biases, both negative and positive, towards different types of investment and/or counterparties and it falls to officers to find ways to challenge those prejudices.

It’s often personal experience, quite naturally, that informs elected members and shapes the ideas they bring to the table. Yesterday we heard from an officer who couldn’t get sign off on building societies because of a negative experience a member had had with a single counterparty, as a retail customer. We heard from others who wanted to invest in money market funds and couldn’t because they hadn’t been able to overcome member reluctance to them.

Whatever the type of investment though, it was interesting to see that to a greater or lesser extent, treasury officers felt they could make their cash work harder if they could just bring their politicians round to looking at risk in a more structured way.

Two truisms, for me, emerged from the discussion: there is no point taking greater risk if you don’t get rewarded for it and there is not point yielding little when you could get more for the same level of risk. That’s all very well, but if you don’t have simple ways of demonstrating to members how much risk each type of investment carries, then those basic messages get lost amidst the bias and conjecture.

An interesting and, dare I say it, fun exercise is to get members to play devil’s advocate by drawing different asset classes from a hat and asking them to make the case for, or argue against, a given investment. A short explanation starting, for example, “We should/shouldn’t be investing in corporate bonds because…” will show you, and more importantly the members themselves, whether or not they have understood the associated risks, regardless of their personal views. If they can’t make the cases both for and against an investment then perhaps there’s room for some further training.

If you have any useful exercises or training tips for getting members to challenge their own preconceptions or for exploring investment risk, send them in or post them here.

——————————————————————————————————————————————————–

EVENTS The 5th Local Authority Treasurers’ Investment Forum
September 19th, 2013
Local authority finance officers REGISTER free, subject to availability.