Colin Sharp and David Janes on treasury investment strategy

Colin Sharp is acting director of finance and Section 151 officer at Leicester City Council and has been with the council for five years. David Janes has been treasury manager in a variety of permutations for the last two decades. Before joining Leicester Janes worked in other local government, the NHS and the West Midlands Enterprise Board.

Room 151: How big is the general fund in terms of cash balances?

David Janes: Cash balances invested tend to fluctuate between about £60m at the trough to £130m at peak, that’s the monthly cycle peaking just before payroll and the general cycle throughout the year.

Room 151: What is your approach to investing the general fund?

DJ: We have been at the ultra-cautious end of the market since 2008. Over the last year we have finally ventured back into some market lending and currently have about £30m out with UK high street banks.

Room 151: How is that split up?

DJ: We have a £6m limit per counterparty or group.

Room 151: How big is the list of bank counterparties?

DJ: It really is only the UK high street banks, Lloyds, Barclays, RBS, Nat West. Santander has just recently gone off our list. We took them off last week having had them on overnight. On paper you could say Santander are in substance a UK bank, they’re a well regarded bank, very tightly managed, but it is a difficult situation.

Colin Sharp: The reputational issue is the problem. If you place money with Santander now and suddenly it wasn’t paid back or there was a problem your reputation would be in quite a lot of difficulty. The man on the street in Leicester would say ‘well, why did you put money with Santander? Didn’t you learn the lesson from Iceland?’.

As it happens the council didn’t have any money in Icelandic banks, my predecessor along with David has always taken a cautious approach to investments, so we not only like to look at the ratings but think, if something went wrong, what would the damage be.

Room 151: Do you lend to other local authorities?

DJ: They are next in order of preference, we make a lot of use of local authorities as a secure home.

Room 151: Do you do it though brokers?

DJ: Quite a bit is still done through brokers. We have some contacts to do it direct but the advantage to brokers is they have the names and the amounts and can deal quickly. The advantage of doing it direct is more relevant for the ones doing the borrowing because they are the people paying the brokerage.

I was looking at the figures this morning and there is somewhere close to £80m out with local authorities. We are at our peak though because payroll goes out soon so we have the money in but haven’t paid it out, so that knocks £35m off those balances.

Room 151: How many local authorities is the sum spread across?

DJ: From 15 to 20 names.

Room 151: So is the DMO last resort for lending as they don’t pay well?

CS: Yes, that’s right.

DJ: We are trying to get an account open for treasury bills and are sorting out the paperwork so that we can invest in them. This is the first time we’ve done that. But we’re doing it because it gives us an option that is as secure as DMO and would give us a bit more yield. Also, if things go badly pear-shaped we have at least another option that we can go to, other than the DMO.

Room 151: What sort of duration are you looking at?

DJ: We haven’t got firm plans but if we were to make the most of treasury bills we’d be happy to go for longer durations to pick up the yield there whereas the DMO is 0.25% across the board, regardless of maturity. With the treasury bills the longer you go obviously the more basis points you pick up. The longest is six months and when we first started looking a couple of months back you’d have got around 0.4%.

Room 151: How do you feel about money market funds?

DJ: They are in the pipeline. I am keeping a close eye on developments there at the moment. Clearly they are being very cautious but they still have some European exposures.

The one we have lined up at present is Blackrock. The logic there is that you have a very large fund and given it is owned by an American firm they will hopefully be taking a good, dispassionate outlook on what is happening in Europe. Also, being very large and having a lot of funds, they have their reputational risk to manage.

In terms of what we’re looking for in the underlying structure of the funds we are looking for something that is relatively short dated. Most of them are 30 days weighted aren’t they.

Room 151: Do you take advice for the general fund?

DJ: Yes, we took Arlingclose on in early 2009 and we have always seen eye to eye. From the outset they were very cautious and their advice has supported us.

Room 151: Do you do much borrowing?

CS: We’ve taken the view to use our cash balances by and large so what we have done over time is to run those down rather than take out new borrowing. It’s just a safer approach at the moment and if we borrow it would cost us more than we would get on the cash balances. So it’s cheaper and safer in the current environment to run down the cash, although it is something David keeps under review.

DJ: I have a pretty long-dated debt profile and while there is always scope for new schemes to come along in general our assumptions would indicate our capital financing requirement has peaked and may well be in decline.

CS: This government uses grant-funding for any capital requirements whereas the previous government issued borrowing approvals and funded the cost as repayment of borrowings. Now, although there is not a great deal of government-backed capital spending around, at least they do give us the cash now so we don’t have to borrow.

In essence the only thing we would borrow for now is to refinance a maturing loan, or if we were doing a major scheme locally that wasn’t backed by the government or any other external funding.

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The Local Authority Treasurers’ Investment Forum: September 25th, 2012, London Stock Exchange
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