Andrew Lovegrove: Purchasing power and the limits of treasury strategy
0When I arrived in Stratford I discovered in the corner of the office the minutes for the Warwickshire Association of Finance Officers, or WAFO from its inception in 1942 to the mid-seventies. This is a group of the chief finance officers from the various councils that are part of Warwickshire. WAFO is still going strong, the main difference is that the constituent councils are different thanks to the 1974 reorganisation.
My initial thought was I need to get the minutes lodged in the county archive, but before I did I found a little time to have a quick flick through the book.
In 1942, the country was at war, and local government was playing its part. A couple of events leapt out at me. Firstly, in 1943 the War Office decided to commandeer a number of pieces of land owned by the council to set up tented communities for displaced families to live in.
The minutes conveyed the feeling of outrage from the officers in a style that only the British can do. The outrage was in two parts: the first because the officers had plans for the land; and then the unexpected increase in demand for council services caused by the influx in residents. The minutes inferred that the officers were more upset about the loss of the land.
A year later the meeting was in a much more buoyant mood. There was a minute describing the recent changes regarding the tented community as most satisfactory, though sadly the minutes failed to detail the changes; one can only assume that councils were deriving an income from the arrangement as, sadly, people were still living under canvas.
Lessons
So, what can we learn from this? It is clear that there have been tensions between local and central government for a very long time, but importantly local government is good a finding solutions to problems.
Today, we are faced with the challenge of investing the council’s spare cash, and we need to ensure that we at least maintain its relative purchasing power and to do this we need a return broadly comparable to inflation. This becomes an increasing challenge, given the various pull factors that are likely to increase inflation over the coming months, and comes against the backdrop of monetary policy that is designed to discourage money being left on deposit.
This means we need to consider taking a little more risk and, or, little less liquidity to maintain the relative purchasing power. In Warwickshire we have been looking at ways of diversifying our treasury management strategy to sweat a little more return from our spare cash.
I pondered the possibility of investing in gold. According to google a £50m pile of gold weighs just over one and half tons, or just about the payload of transit van. But before I had an interesting conversation with our insurance officer I reflected that gold, priced in US dollars, may be a little more risk than we would be comfortable with.
We have been knocking on a number of doors, speaking to a range of people to find out what investment opportunities are out there. I have sat through numerous hour long presentations at the end of which I am none the wiser as to what the council’s money will actually be used for. Some of these have promised inflation beating returns, but have very little detail on how this will be achieved.
I have also listened to presentations that are crystal clear what the money will be used for, whether there is additional security on offer, the downside risks, and the liquidity profile. We are looking closely at these and hope to build some of these into our treasury management strategy.
Purchasing power
We have to face the reality that given the current monetary policy the best we can realistically hope for at the moment is to maintain the purchasing power of our spare cash. There will be plenty of time in the future when the monetary policy changes to make for better returns.
There is no such thing as a risk free investment that provides inflation beating returns with complete liquidity. I am not saying risk is a bad thing, just that you need to be fully aware of the risks you are taking.
I for one don’t want to be the one who makes his mark in the WAFO minutes as the person who failed to heed the old adage that if it seems too good to true, it probably is.
Andrew Lovegrove, head of corporate financial services, Warwickshire County Council.
