Q&A with King and Shaxson’s Alan Simkins on a new online facility
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Alan Simkins
Alan Simkins, director of the Local Authority Division at investment firm King and Shaxson, outlines how the firm is celebrating its 150th birthday with a new offer.
Room151: Your local authority custody account has grown considerably in recent years. Tell us what changes you’re implementing and why?
Alan Simkins: Yes indeed. We are proud of our position in the market – we have built relationships with 240 local authorities, with £3.2bn under custody at the end of December 2015. Our ambition is to add value, and to this end, to coincide with our 150th anniversary we have introduced price reductions and enhancements to our service. More than 80% of our clients will see a reduction in their dealing fees, with a number falling to as low as two basis points (0.02%).
We are also excited to announce the provision of free year-end valuations for custody clients from 31 March 16, from our independent valuations team. We have an active presence in the market, the team conduct a comprehensive analysis based on actual transactions, in order to produce valuations which are real, relevant and the basis for which any sale of stock can be undertaken.
R151: And you’re launching the King’s Portal. What service does it provide and who can use it?
AS: We are very excited about the portal – it will provide local authorities with a secure online dealing facility for inter-authority cash funding, certificates of deposit, treasury bills and both fixed and floating bonds. Whether clients have used securities for years, or are just beginning, the portal will cater for all. Clients will have access to training materials such as presentations, calculators, research notes and product notes on individual securities.
Authorities do not currently receive advice from cash brokers so the portal, combined with our phone-based support, will help local authority treasurers make better informed investment decisions. There will also be a function to view trade history, custody statements and valuation reports. We would like to retain as much contact with our LA clients as required; the portal offers another level of assistance. We hope it will lessen the impact on their resources, offering a ready source of information. For our dealing and custody customers; the service will be completely free.
R151: Local authority short-term lending had grown substantially since 2010 or thereabouts. Do you see further growth and can you tell us a bit about how much trading is currently going on? What sort of duration is being offered? And, whether there is a market outside the sector for buying LA paper?
AS: There are certain pinch points through the year where authorities are looking to borrow to cover gaps – for example Christmas or the end of the financial year, where short-term funding tends to go above normal levels. Generally though, councils would be looking to borrow anywhere from overnight to five years – the majority of trading is out to one year.
We don’t see a market outside the sector for buying LA paper on a large scale – a lender from outside the sector would consider what return they receive in Treasury Bills or for instant access and the local authority would have to compete with that. Historically, local authorities have dealt with each other, as they have been able to achieve cheaper funding than might be obtainable from a lender outside the sector. A lender may also require a premium for the lack of liquidity. The highest accepted yield in 3-month treasury bills last week was 50 basis points (0.50%), while local authorities are currently funding around 40 basis points for the same period, so there is a better return on treasury bills.
R151: Does the devolution agenda impact the presumed sovereign status of LA paper? Or, put another way, is there a greater chance of a default where an authority assumes full fiscal autonomy?
AS: If devolution comes through and gives authorities greater power over finances and the ability to raise and retain funding, I would view that as a good thing. I don’t necessarily see that they would be at a greater risk of default.
R151: How are the corporate debt and treasury bills markets fairing among local authority investors?
AS: Both are very popular. In the year to October 2015 – investment in treasury bills doubled, and in fixed bonds it increased eight-fold. We are well past the days where transferable securities were seen as the new kid on the block. In last week’s Treasury Bill tender the six-month highest accepted yield was 0.529%, when you compare that to what is on offer through a call account and money market funds, the rates are very attractive. Moreover, they provide liquidity and are a form of government debt.
Many authorities have amended their treasury policies to include both financial and corporate debt, in order to diversify holdings and increase returns within their specified investment parameters. Historically, one of the misconceptions of using transferable securities was that there is a risk of capital loss, which is simply not true. As long as the buyer is comfortable with the credit quality, there is no additional risk to capital relative to the equivalent fixed deposit, as long as the investment is held to maturity. The same investment analysis should be applied to transferable securities as with any other investment.
R151: Every year we publish the data from DGLG about how LA treasurers invest their money. Are you expecting to see any big trends emerge this year?
AS: As with Tbills and bonds – we have seen consistent growth in Certificates of Deposit investment and Floating Rate Notes have increased fivefold over the year. This is another indication that such instruments have been adding value to local authority treasury portfolios for some time. For many, they are firmly embedded in the portfolio, no longer on the periphery of the TMS. We expect to see a continuation of this throughout 2016 and beyond.
R151: Where do you see the best value for your LA clients over the coming year?
AS: Each authority has got a different treasury management strategy and these can vary dramatically, therefore the perceived value will be different for each. We will continue to work closely with each customer to determine where we can find best value within the context of their policy. For some this will mean a focus on mitigating interest rate or bail-in risk – for others it could be a focus on enhancing yield once security and liquidity have been achieved. With the launch of the portal and our commitment to personally visiting all clients, we will work toward a solution for each authority to ensure they are getting the most from their TMS.
R151: It’s been a turbulent start to the year, economically. What are the major risks you think local authorities are facing currently?
AS: From a treasury perspective, there is a lot to focus on. The US Federal Reserve raising rates has led to speculation as to when UK might follow suit. The UK domestic outlook is arguably more stable than it has been for a while. Since the turn of the year, however, slowing Chinese growth has had a huge impact on equity markets, and projections for the oil price could lead to lower inflationary pressure. Of course, these factors need to be watched carefully. It is important to have a full armoury of investment options, to maintain the flexibility to adapt to such challenges and implement a view on the market.
This means councils should be careful not to exclude anything from their TMS. For example, if a council includes floating rate notes in the policy and interest rates begin to rise, they can mitigate interest risk. It does not mean they have to be used, but at least having access to them can avoid leaving the portfolio unnecessarily exposed. These instruments are not new and have been traded between banks, building societies and fund managers for years. It is exciting that local authorities are embracing them more fully.
This article was sponsored by King & Shaxson.
