Q&A with ICD’s Karl Adams

Karl Adams is director of EU business development at ICD. He explains the advantages of investing in money market funds through a portal, and takes a wider look at the MMF environment.

Room151: What advantages can an MMF portal offer over dealing with MMFs directly?

Karl Adams: What we like to say is that an investor benefits in a number of ways by using a portal.
Firstly, client services. Investors have access to a trade desk. If they have any questions or need any information, they only have to call one number. It also provides consolidated trading: rather than having to phone five individual funds (for example) they can raise one consolidated ticket – and make all their trades via one ticket, and settle them all by one payment using a clearing solution. The third benefit is risk management. There has been a lot of change in the financial environment recently. A portal can provide analytics across the clients’ whole portfolio – which we can upload – and give them information on their risk exposure. Finally, technical integration means that councils can integrate the system with their own treasury management system, providing efficiencies in trading activity.

R151: What drives local authority buying behaviour in the MMF space…does security always trump liquidity and yield in your opinion?

KA: Security trumps liquidity and yield. It always should. I heard a speaker recently saying that rule number one is preservation of capital and that rule number two is to remember rule number one. That was from a corporate treasurer, and the principle is the same for councils.

R151: Are MMF buying patterns different in local authority than in the private sector?

KA: Generally I would say no. Perhaps corporates are more driven by relationships. They might feel they have to give business to their key providers of debt finance. However, as local authorities have access to the Public Works Loan Board, they do not face this pressure.

R151: Are you starting to see MMFs push out their duration or buy in more corporate paper to enhance yield?

KA: The first thing to say on that is that MMF funds’ first principal is not yield enhancement. No MMF would say they are trying to enhance their yield. They like to differentiate themselves in that they are doing more capital maintenance. Over the past six months or so we haven’t seen much change in duration or mix of investment types from MMFs.

R151: What is the next phase of portfolio development for MMFs? What do local authorities want or need from them?

KA: MMFs are tied in to what they can and can’t do because they need to  maintain their AAA ratings. The scope for them to change their portfolio is limited. We have had a low yield environment for a long time and councils are looking at other products to accept a little bit more risk. We are seeing more pooled cash instruments such as  enhanced MMFs / short duration bond funds. These are being widely used by local authorities. They are very similar to MMFs but with longer duration.

R151: As a rough percentage how many local authorities are now buying MMFs and how much LA cash is placed in them?

KA: That is a difficult question. I would say that most local authorities are using them or considering them. The external advisors have MMFs as an acceptable instrument to be used. We have more than 80 public sector clients.

R151: Why do you think some councils don’t use MMFs?

KA: I think there is a lack of understanding over what they are investing in. There might be certain counterparties or country exposures they are not comfortable with. These councils should be aware that the funds will have a team looking at this. Treasurers are not able to devote all of their time to looking at the credit ratings of the underlying counterparties in their MMF investments. But those funds will have a whole teams dedicated to doing just that. Using a portal, treasurers also have the analytics that enables them to identify the exposures and risks.

R151: What risks are treasury management strategies running today?

KA: In terms of their investments I believe strategies should be concentrating on diversification more. They should be looking at the whole portfolio and attempt greater diversification – MMFs help with that.

R151: Most councils won’t use derivatives so how can you help them manage interest rate risk, for example?

KA: Access to analytics of MMFs will help the investor identify the risks. Regular use of analytics provides them with an extra layer of due diligence. Portals enable the user to access this information.

R151: You used to work in local authority treasury – how has the role changed in your view and what are the big challenges?

KA: To me personally the biggest change is the interest rate environment. In basic terms treasury management hasn’t changed – the bottom line is still capital preservation. When I last worked in a local authority at least we had a yield. These days, treasurers don’t have a big yield to get. Another change that happened as a result of events over the last few years is the use of risk metrics. In my time there was a heavy reliance on credit ratings to manage risk.

R151: Knowing what you know now would you manage a local authority portfolio any differently?

KA: I think I would. We didn’t use money funds because they weren’t available when I did it. I was using term deposits and call accounts. Now if I was looking at a portfolio I would use more pooled deposits – MMFs, short duration bond funds and enhanced funds. If it was applicable, I would use a longer dated fund to get a better yield, and use a mix to enhance the yield, leaving a balance in each of the products.

R151: Are you seeing appetite develop for other types of funds or financial instruments?

KA: We haven’t moved into other instruments like term deposits – we haven’t really seen a demand. Most corporates tend to use their relationship bank and councils tend to use a small number of brokers because that is what they are used to.

R151: Are looming EU regulations surrounding MMFs reducing appetite for the instrument?

KA: There is a lot of uncertainty. Where there is uncertainty, maybe some are thinking twice about entering the market. But it is not impacting those who are already in. They are currently happy with the set-up and can get same-day access and change their strategy quickly according to circumstances.