Ben Lockwood on bonds, MMFs and understanding risk

Ben Lockwood is finance manager and deputy 151 officer at Ashford Borough Council. He joined the authority in July 2002 as a senior accountant and became a qualified accountant in 2003. Before joining Ashford he was a trainee accountant at the Kent Fire and Rescue Service.

Room 151: How would you describe your treasury management style?

Ben Lockwood: We try to keep a fairly open mind and do some new and different things. So early on, back in the noughties, we got involved in Euro-Sterling bonds and were one of the early ones to take that up, in the main due to good advice. We’re with Arlingclose who were trying different approaches to straight cash investment and we got quite involved in exploring some of their options on balancing investment types, which is quite interesting. Because of the cash accounting rules we weren’t able to do that at that time but those rules have now been relaxed. We took that quite a long way and we’ve been doing work on the modeling of debt portfolios and looking at managing risk within investment portfolios.

Room 151: What Euro-Sterling bonds do you invest in?

BL: With the Euro-Sterling bonds we started in 20012-ish with investment bonds issued by the European Investment Bank. At the time we were looking at them they were offering really good returns. They still now offer better returns than standard Sovereign gilts but they have triple A credit ratings. So there’s the good return, lower risk and they’re tradable, so pretty liquid.

The issue was sorting through the custodian agreements for bonds and setting that up. Fortunately my predecessor had done that so it made life fairly easy. A little bit disappointing from my point of view is that last year our members got very wary of anything Euro so we had to sell the majority of our Euro-Sterling bond portfolio. That was a shame because it was yielding well over 4%. We had £11-12m of bonds yielding 4.5% and they were denominated in Sterling. Every single member country of the EU shared in underwriting that bank so if the bank wasn’t there pretty much half the governments in Europe wouldn’t have been there.

It was one of those times when you disagree with your political masters because the treasury risk wasn’t there – the political risk was the uncertainty over the Euro. But they are our political masters and sometimes you have to make those decisions. Our members in the main are financially aware and some have a financial background but it was just the wrong name to crop up at the wrong time so we had to retreat and use local-to-local investments instead.

Primarily we do that now and we use the DMO as a bolthole of last resort. Our members have been very wary on the banking crisis and we’ve gradually retreated up the credit list and there’s no end in sight really. We’re operating very well within our treasury policy and a lot of councils are still using the systemically important banks as counterparties which we’re not allowed to use at the moment. We’ve had our hands fairly effectively tied but our main priority is making sure the money comes back to us now.

Room 151: What investable reserve do you have?

BL: We usually invest £30m and it’s pretty much with other authorities and the DMO. We do have a couple of investments with banks which are just coming to maturity and we’ve got one money market fund which we’re using.

Room 151: How do you feel about MMFs?

BL: We have a Bank of Scotland one. It’s in gilts and corporate paper. I am a bit wary of the fact that if we used more than one MMF we’d end up with a lot of exposure because they tend to have the same sort of spread of investments with the same sort of counterparties. If one counterparty in the fund failed then that fund would get frozen for a number of days while they unpick the fund to understand what their exposure was to that counterparty.

If we used five or six MMFs, which we could do, you have an issue where you might have all five of them being frozen for a couple of days while they sort them out, relaunch them and revalue them. It is something that we are very mindful of from a credit risk point of view. You could have a number of funds and they all be triple A rated but you’ve still got all your eggs in one basket. In this kind of environment you don’t want that.

Room 151: The shrinking list of counterparties in general makes for quite dull times in treasury management doesn’t it?

BL: Yes, actually. Treasury used to be something that was quite exciting, quite dynamic and a big part of your job and it’s quite a benign thing now with the restrictions you have on your investments.

Room 151: Are there opportunities out there nonetheless?

BL: You could look at treasury bills, supranational bonds, pooled investment vehicles like property portfolios, such as LAMIT’s fund (The Local Authorities’ Property Fund) and a few other money market fund equivalents for property. Those would be a few ways that you could add value but you have got to make sure that the bulk of the portfolio is sound and coming back because you can’t take the risk at the moment.

Room 151: What prompted you to exit the Icelandic banks a year before it went wrong?

BL: We’re customers of Arlingclose and that was their advice. They felt there was stress within the Icelandic economy and that there was strain in the banking system. So they were advising, a year before Iceland went wrong, that we shouldn’t be in those banks so we withdrew them from our portfolio.

Hindsight is a wonderful thing isn’t it? Whilst we had minimal use of Icelandic banks it is one of those things that you look at and feel very glad that you have taken that action.

You look at some economies and you have got a government-backed guarantee, but in the case of Iceland their economy was based on fish, so is that sovereign guarantee really worth having?

We were also advised to stop using Irish banks partly because Arlingclose were looking at the amount of debt, nationally that they had and thinking, well, they’ve got a refinancing problem in a year, 18 months time. The work that they have done is quite interesting because they’ve looked at more than just credit ratings to assess the credit-worthiness of banks and problem economies. Quite soon after the Icelandic problems Arlingclose started to advise against Irish banks. At that stage we were pretty heavily exposed to Ulster Bank and various others so I was quite happy when all our investments came back from Ireland.

Room 151: What do you think the hardest part of treasury management is?

BL: I think it is – in the current environment – understanding credit risk. The saying that if it looks too good to be true that’s because it is, rings quite true. You have got to ask yourself, if they’re paying double base rate on an overnight deposit why do they need to do that? I think the mindset to get into is not to chase return but to actually understand risk.