Bridget Uku on MMFs, infrastructure and shoe shops

Bridget Uku has been group manager, treasury and investments, for the London Borough of Ealing for the past five years. Before that she was investments and insurance finance manager at the Greater London Authority and worked in pensions for LB Lewisham. She became Cipfa qualified in LB Hackney having completed a law degree.

Room 151: Money market funds are becoming yet more squeezed in terms of where they can invest. What sort of role are they playing in your treasury management strategy since the Eurozone crisis?

Bridget Uku: As the Eurozone debt crisis escalated towards the end of last year we got worried and looked into the underlying investments within our money market funds. We felt a little uncomfortable so we pulled out at that point. We watched events unfold and the LTRO, the long term refinancing operation infused quite a lot of money into the Eurozone and things seemed to have calmed down for a while. What we have heard recently is that the American money market funds have increased their lending into Eurozone so we thought that looked good. However, looking at the markets, Spain seems to be falling apart and the Eurozone seems to be going back into some sort of chaos so we are waiting to see what happens.

There is a money market fund that does repo lending though, it’s collateralised with treasury lending and possibly we could go into that, but we are being cautious.
So at the moment we have no money market funds at all but we are still set up on the portal and can go in at any time once we decide to.

Room151: Does not being able to invest in these funds make things very difficult?

BU: Oh yes, before we could diversify, get reasonably good returns with exposure to a number of counterparties and have capital security. We were always in two funds with a constant net asset value so we knew that that was fairly safe. When we looked into those underlyings though we felt it better to come out. They have so little to invest in.

Room 151: Where do you stand on the issue of using derivatives to manage treasury risk?

BU: I don’t think that at Ealing we need to use them for the current treasury risk exposures we have in what we are doing. It is nice to have the flexibility to use them for those who truly understand what they are getting into. Derivatives are complex and involve sometimes making costly bets: a trade that can look like a no-brainer today can have a catastrophic impact in the future. I don’t currently use them and don’t need it for the risks we’re exposed to but I would use them if I felt I needed them.

Room 151: How is your borrowing strategy taking shape for the coming years?

BU: Last year we managed to borrow quite a bit of money at quite depressed gilt yields and there was the PWLB rate, so we took some money out at the time. Going forward our borrowing needs are tailing off for the general fund and the HRA. We are running a dual strategy so splitting the two and running the two pool system. That gives us more flexibility. We can borrow at the right time for each pool, maybe do some internal borrowing between pools and restructuring of debt between the two. We’re quite excited about this new proposal for discounted PWLB rates. We’re waiting to hear what the criteria are for getting this 20bps discount and will be looking to use some of that going forward.

Room 151: Do you see much changing over the next 12 months in terms of who you lend to?

BU: Well financial markets are quite event-driven and move from optimism to pessimism quickly, so it is hard to say what will happen in the next six to twelve months. That said, one thing that is sure is that we will still be lending to other local authorities and the UK government – directly and through treasury bills.
Otherwise, nothing is certain. It’ll take time to get back to the place where we had 30, 40 parties on our approved list. I don’t see that happening for a while.

Room 151: Would you say that the pool of counterparties is uncomfortably small?

BU: It is small but once you include other local authorities, you might not be getting the yield but it’s a big pool.

Room 151: How would you describe your asset allocation in the pension fund?

BU: It’s strictly traditional at the moment. It’s 75% equities, 25% bonds. We are diversifying with a move toward 10% in property which will probably be disinvested from equities but it has been like this for four years going on five. We moved from a balanced mandate to a specialist mandate.

Room 151: How do you feel about using property as an asset class?

BU: We have none currently but have had approval to invest in property and that will now happen in the near term. We’re going to look at direct pooled funds (as opposed to fund of funds). We used to have direct property investment, we used to own shoe shops, but that was a very long time ago, before I came here.

Room 151: How do you feel about the prospect of pension money being used to fund infrastructure?

BU: Infrastructure as an asset class with long term inflation-linked returns can be very attractive. It can be used to match liabilities and pensions could have a role in replacing the UK’s infrastructure, but it is important that we enter into an investment that is credible. It has to stack up for us. I do welcome plans to explore and find easier vehicles for us to access infrastructure investment but one thing for a pension fund is that with a lot of infrastructure there is a lot of development risk. You don’t want to be in at the start where there are over-runs and that sort of thing and you’re not getting a return – it might be ten years before you get a return, depending on what sort of scheme it is. Infrastructure is a very broad asset class, going from toll roads to renewable energy. You could have a wind farm and if you don’t get wind you’re stuffed. You want to make sure that the investment case is robust.

Room 151: Can you see an amalgamated London fund ever happening?

BU: There are already a number of joint working initiatives currently underway that will enable London funds to achieve economies of scale on fees. This should avoid the need for full amalgamation which could see the dismantling of the local democratic autonomy of each fund to determine their asset allocation, fund performance and ultimately the employer contribution.