Cash balances set to shrink

Michael Quicke, chief executive, CCLA, at LATIF 2015

More than a third of local authority treasurers expect cash balances to plummet over the next five years, according to a survey carried out by Room151.co.uk.

The survey results, released at this week’s Local Authority Treasurers’ Investment Forum, found that 37% of respondents expect the level of investments to fall by more than a quarter.

Only a quarter of those responding said they expect levels to rise or stay the same, with 35% expecting a fall of up to 25%.

Commenting on the results at the forum, Michael Quicke, chief executive of investment manager CCLA, said that the results would make it more difficult for local authorities to beat the low interest rate environment.

“If your money is going to disappear quickly then your capacity to make longer term investments is severely curtailed. If you are looking at higher risk and return assets it is time that they need to do their magic. The volatility and cost of investment means they need to be held for a decent period of time to get the best value out of them,” he said.

He added that the best guess for the expected fall in investment balances was around a third, but the results demonstrated a lack of certainty among treasurers.

“Of course, if you can’t predict how much money you will have in five years you don’t know what concentration you will have at that point.

“If your pool is going to drop by a third, an investment of 10% becomes 15% in five years time. If your funds are going to drop by 75% it will become 40%. It is really important to get a strong grip on what your cashflow will look like.”

The survey was carried out last month among 103 senior treasury managers in the local authority sector.

Other results showed that 61% of respondents said their portfolio is now more diversified than five years ago.

Those who have diversified, 43%, said it was because there was less security in traditional counterparties, with 24% saying their authority was under-diversified and 18% citing lower interest rates.

Another healthy majority –  66% – said their entire treasury investment yielded between 0.5 to 1% last year, with 18.63% saying 1-2 and only 0.98% saying more than 2%.

Quicke said: “That is reasonably predictable. If you take the yield curve a year ago, and assume a treasurer has an  average duration in their portfolio of 4 months, then they would have had a return of about three quarters of a percent. Those with lower returns would probably have invested in the DMO, yielding a quarter of a percent.

“Those earning more were either taking more risk or investing in other assets.”

He said that a 10% investment in property would have taken a portfolio yielding 0.75% to over 1.1% over the period.

Other key points from the survey:

• 70% of senior local authority treasurers believe unsecured bank deposits do not adequately reward – local authority investors.
• 61% expect interest rates to peak at between 2% and 3% in the next five years.
• 87% held investments in money market funds in the past year, with 49% in certificates of deposit and 30% in property funds.

Photo: Tina Miguel.