Michael Quicke: The Public Sector Deposit Fund & 2012

Michael Quicke is the chief executive of CCLA, the investment fund management company who runs the Public Sector Deposit Fund.

Room 151: How many local authorities invest in the Public Sector Deposit Fund (PSDF)?

Michael Quicke: There are about 30 authorities invested. The way it works is that the fund has to find its way onto the treasury policy of the local authority and because that is a public document we see that happening all over the place. That is the first piece then we have LAs coming in and opening accounts, there are about ten of those at the moment and the 30 invested in the fund. There is a lot of interest.

R151: It’s a difficult time for authorities to find places to put their money isn’t it?

MQ: That’s the thing. It’s difficult for people putting money with the banking sector and many local authorities are finding it difficult to get their mind around what’s going on and to get the diversification that makes them feel comfortable and I think that is the reason why they’re interested in the fund.

R151: What sort of amounts do authorities invest?

MQ: Very differing amounts. From £10m or more down to small amounts, it comes in and goes out, lots of flows with varying amounts of money.

R151: What sort of durations do you see?

MQ: It’s a liquidity fund available on a day by day basis so investors are there using it on a weekly and monthly basis putting money in and taking it out.

R151: How did your relationship with LAs start?

MQ: The predecessor organisations to CCLA had been around for 50 or more years. One of our shareholders is a trust company called LAMIT, the Local Authority Mutual Investment Trust which was established in the sixties. They promote the investment of funds for local authorities so there has been a long term relationship between us and local authorities, this is just the most recent iteration of that.

R151: Why is the PSDF different from its competition?

MQ: There are a large number of money market funds out there from people like Deutche, Blackrock, Aviva, Scottish Widows but there are a lot of things that make this fund different. One of them is that the fund is open to relatively small investors so parishes and councils can just invest £25,000 which is relatively low for the money market sector. There is also a very strong transparency. Every day we publish to everyone, not just clients, how the fund is invested. That makes local authorities feel very comfortable about where the money is, and we invest in very vanilla objects.

A lot of money market funds invest in complex objects that would look very odd if you’re not a money market professional. We think that it is important for local authorities that their officers and members understand how the money is invested so we are simply investing with banks, with core or term deposits, CDs, so you don’t need a PhD in investment to understand what is going on. One of the things that came out of the credit crunch was this concern that there are these esoteric objects that people don’t understand.

We have also established an advisory board comprising individuals from the local authority sector who we meet with on a regular basis. They quiz us about the management of the fund and the papers and minutes of that board go on the website, so there is a sense that the local authorities are engaging with the fund.

We were also keen to be domiciled and regulated in the UK. Almost all of the money market funds are not, they’re in Luxembourg, Dublin or other jurisdictions. We felt it was important to have that domestic focus and regulation by the FSA – it’s public money and there is a sense that it needs to be overseen on a domestic basis. We do things like monitor the environmental and social and governance issues of the counterparties because we are keen that the sector is aware of reputational, social and responsibility policy so we do that on behalf of the sector.

R151: How are you navigating the Eurozone crisis?

MQ: What is clear to us is that the central banks of core Europe have the wherewithal and the motivation to support their banking system and systemic institutions in core Europe are safe institutions to place funds with. We have for a long time not placed money with peripheral countries within Europe and we use as an early warning signal the credit default swap and the relationship to credit default swaps in particular jurisdictions and the credit default swap market as a whole and use that as an early warning sign so that when it goes over various trigger points we exclude any counterparty within that country because there is then the question mark over whether that country has the wherewithal to support its banking system.

For the countries that do have the wherewithal to support their banking system we focus on clearly systemic institutions. Every institution we use is graded as systemic by us and credit ratings agencies. In that way we feel we’re a long way from doing anything risky in the Eurozone.

We are also very keen to only place funds in jurisdictions which are clearly safe. You could have a systemic bank which had a subsidiary in a jurisdiction where it was not systemic and we would not place funds in that subsidiary because if something goes wrong you can be sure whether the guillotine will come down.

There are clearly a lot of political high jinx going on at the moment with the core jurisdictions attempting to get certain behaviours out of other jurisdictions, which is resulting in this disruption, but it is clear that in the core those central banks would do what was required to support systemic banks.

In a way things are much safer now than they were at the beginning of the credit crunch. The concept of printing money to save your banking system then was completely alien. Now it’s completely normal, it may not be liked but it is normal for jurisdictions to print money to save their banking system, we have been through the political gates that ensure that those mechanisms to save banking systems are established.

R151: What are the other big challenges for 2012?

MQ: The credit risk challenge is always there. I’ve made the point about peripheral versus core, and where that boundary is moving, and that’s one of the challenges, what is going to end up one side or other of the boundary.

Clearly we’re in an environment of historically low interest rates, which are going to stay that way for some time. I think that there is a great deal of interest from investors to maximise their interest income and that provides a competitative environment, which is interesting.

There are also regulatory issues, money market funds are important to the regulatory system and there are discussions about changes and controls to them happening all over the world. That may be a challenge in the coming year and beyond.