Room151 annual investment survey: 10 treasury takeaways
0As our Annual Treasury Investment Survey results go out to participants this week, what better time to reflect on the data and to focus on some of the responses that caught the eye at Room151.
As ever, we wanted to create some useful, peer-generated intelligence for local authority treasurers who are navigating quite extraordinary change in their field.
It doesn’t seem too long ago that the investment side of the job largely involved managing and monitoring a list of approved bank counterparts. But since the banking crisis there has been a steady and substantial flow of local authority capital out of banks and into a variety of investment instruments and asset classes.
In 2008/09, the Department of Communities and Local Government reported that over 72% of all local government treasury capital sat in bank or building society deposit accounts. According to their latest quarterly data, that figure has fallen to around 48%.
During this same period, local government total treasury capital has swelled by around 25%, so while cash has moved on to the investment balance sheet, more and more of it has moved out of traditional high street deposit accounts.
The chief beneficiaries of this phenomena have been money market funds and so-called local-to-local lending, and both of those trends look set to enjoy further growth, albeit at a slower pace to recent years.
103 separate authorities took part in this year’s survey – here’s a little more information about them and some of the things we discovered.
Survey respondents by authority type
1. 93% of all respondents currently hold £0 in the DMADF and only two authorities have allocated over 20% to the facility.
A low yield and the availability of sovereign credit risk through instruments like T-bills (offering a higher yield) have rendered the DMO’s deposit account facility almost obsolete to the majority of local authorities. Four authorities surveyed had 10%, or more, of assets-under-management (AUM) placed with the DMADF and all four planned to either decrease substantially or decrease somewhat those allocations.
2. The average AUM held in money market funds was 26%.
DCLG’s latest stats show a 20% allocation to money market funds so either Room151 readers are more likely to invest in MMFs or there has been significant growth in allocations in the last few months. 34% of respondents plan to increase somewhat allocations to MMFs whereas 20% intend to decrease allocations.
3. Only 1 authority has 100% of AUM in bank deposits.
Bucking the trend outlined above is a lone authority keeping the faith with high street bank counterparties. The plans of other authorities, however, appears to be more of the same: almost 40% intend to decrease somewhat or decrease substantially their allocations to bank deposits in the coming years wheras 49.5% expect no change.
Survey respondents by treasury AUM
4. Property funds and corporate bonds look set to enjoy a good year.
Treasurers are increasingly identifying core segments of their cash balances and matching them to risk assets where some volatility is expected over time and some extra yield is required for the additional risk taken. Appetite continues to grow for both property and corporate bonds as 0% of respondents forecast decreased allocations to either asset class, whereas 32% are looking to up investments in property or property funds and 25% envisage further investment in corporate bonds.
5. Five per cent of authorities have 10% or more of treasury assets allocated to equities.
Also traditionally the preserve of the longer-term institutional investor’s toolkit, equities are the preferred route for some treasurers looking to generate some additional income over time. The highest allocation of any authority to equity products is 25%.
6. Only 7.77% of authorities expect medium-term investment balances to increase.
Notwithstanding some fairly eye-watering numbers on the borrowing side this year, the vast majority of treasurers see their investment balances shrinking over the medium term. Five percent of respondents see those balances falling close to zero.
7. Yield is on the rise.
Despite the adverse conditions for treasurers and the lower-for-longer rate environment taking firm root, local authorities have made steady increases on the yields they reported in last year’s survey. In 2015 only a single authority reported an annual yield above 2%. In 2016, 6.8% could boast the same figure. Over 20% yielded 1-2% on their portfolios this year (compared to 18.6% in 2015) and only 8.7% yielded between 0.25% and 0.5% (compared to 13.7% last year).
8. 72% of authorities now lend to, or borrow from, other authorities.
Local to local lending/borrowing has mushroomed across the sector as treasurers look for counterparties they are comfortable with. Average durations of loans (see table below) vary widely.
Average duration of loans to other local authorities
9. Default? Don’t be daft.
We asked treasurers if they thought it was at all likely that a local authority would default on its short-term debt in the next few years. ‘Don’t be daft’ was the response from 17.5% of those surveyed. The majority (70.9%) thought a default was ‘quite unlikely’ whereas 10.7% thought it ‘quite likely’ and a single respondent answered ‘very likely’. Watch this space!
10. Lower for even longer…
Last year we asked treasurers where they expected interest rates to peak in the next five years. 60.8% felt at the time that the base rate wouldn’t go above 2-3%. What a difference a year makes: we asked the same questions this year and 14.5% now believe interest rates will peak between 2 and 3% over the five years. Not a single authority in 2016 forecast rates peaking above 4% in the next five years compared to 5% last year.
Peter Findlay is publisher of Room151
