Local authority investments continue to diversify

Local authority deposits with banks and building societies have slumped to just over half of total investments, down from almost three quarters in 2009.

Diversification within the sector continues apace, with just 51.8% of council investments held in bank and building society accounts in the first quarter of 2015/16, according to figures released by the Department for Communities and Local Government.

This is down from 57.6% in the same quarter last year, and a massive drop from 72.8% in 2008/09.
Alan Simkins, local authority dealer at broker King and Shaxson, told Room151: “Councils worried by bail-in risk are now able to mitigate some of this by moving to alternative investments.

“They are able to access a wider range of counterparties by using corporate bonds and other instruments.”

Total investments by local authorities remained relatively steady during the first quarter compared to the same period last year – at around £40.2bn.

However, deposits with banks and building societies fell from £23.1bn to £20.8bn over the year.

The largest shifts were to treasury bills – up from £2bn to £2.9bn over the year, and to money market funds – up from £5bn to £5.9bn.

Although a smaller part of the market, investment in certificates of deposit (CDs) rose more than 60% from 868m to £1.4bn.

Simkins said: “Primarily a DC is an equivalent to a fixed deposit, but you also get the advantage of being able to sell them on. They are a no-brainer unless you get a much better rate of return with a deposit. But some banks aren’t even accepting deposits at the moment.”

However, Mike Jensen, chief investment officer at Lancashire County Council warned that CDs still have the same bail-in risk as unsecured deposits.

He said: “Diversifying into securities is the correct approach but it is better to use instruments that are backed by securities such as covered bonds.

“I also question whether the market in CDs will really work – particularly if people want to start getting rid of them at the same time.”

A survey set to be released at next week’s Local Authority Treasurers’ Investment Forum is set to show that half of local authorities have held CDs in the past 12 months, second only to money market fund investments in terms of alternatives.

The event, taking place in London, is being organised by Room151.

Photo (cropped): Mariano Mantel, Flickr.