New risk appetite ‘demands attitude change’
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Michael Quicke, CCLA
Local authorities are abandoning their risk averse approach in the quest for higher returns, according to Michael Quicke, chief executive of investment manager CCLA.
Quicke was commenting on Room151’s Treasury Investment Survey 2016, which found that only a third of local authority treasurers now consider defaults and credit risk the greatest risk to their portfolio.
Speaking at the Local Authority Treasurers’ Investment Forum (LATIF) in London, he said that there has been an increase in the amount of market risk taken by local authorities frustrated by the low interest rate environment.
He said: “What that does is change the risk profile of what you are doing. If you are just placing cash with counterparties the principle risk is counterparty risk: ‘Am I going to get repaid?’
“Managing diversification of counterparties is the way you manage that risk.”
However, Quicke said that moving into other assets required a change in the approach by local authorities to managing risk.
He said: “You need to be concentrating on the risk at a portfolio level. The value of individual assets will fluctuate from time to time. You mustn’t panic.”
The chief executive said that diversification of asset types was important in spreading risks among higher return assets.
He said: “The best way to do this is through a pooled fund structure. Mixed funds are the best way of diversifying so that the only volatility you are interested in is that of the fund itself.
“You have to have a level of confidence and understanding about what you are doing to ride those ups and downs.”
Also speaking at LATIF, Jason Straker, client portfolio manager in global fixed income and liquidity at JPMorgan Asset Management said that it “now seems opportune to consider lower rated counterparties – both banks and bond issuers.
He said: “Many BBB issuers, such as Heathrow, Vodafone and Centrica are very stable.
“They have a BBB rating because of their levels of debt, but their cashflows make them quite attractive.”
Interest rates were identified in the survey as the top risk to council treasury investments, with 52% citing the issue.
Elsewhere, the survey found that 55% of respondents said that rates would peak at between 1% and 2% in the next five years. Last year, the majority predicted a peak of between 2% and 3%.
Photo: Tina Miguel.
