Treasurers debate investment options at LA conference

Local authority treasurers should be making the most of both money market funds and corporate bonds, according to participants at the Local Authority Treasurers Investment Forum this week. The conference saw a lively debate between panel and audience members with Sean Nolan, ex deputy chief executive of East Sussex, espousing the use of money market funds. “Reputational risk has so out-trumped diversification that we are all investors in the high street,” he observed. “Gilts are not safe actually, they are only safe if you can guarantee your entry and exit price, one has to be careful about what one calls safe … I became more of a fan of money market funds over recent years. I wasn’t a particular fan when the crisis first broke because I thought that they suffered from a lack of transparency and made due diligence and understanding of what they were about difficult. I think they have learned a lesson and I think that we as a sector can keep putting pressure on to make them transparent.”

A selection of highly-rated money market funds is an appropriate investment for a cautious cash management strategy, according to Nolan, who fiercely questioned the use of single corporate bonds. “Whatever the new freedoms are, pooling is best,” he said. “I really don’t think that any local authority should be individually picking capital risks.” The widely-used DMO, he added, is too cautious an approach. Jonathan Hunt, director of corporate finance and investment at Westminster City Council and Tri-Borough director of pensions and treasury said that with interest rates so low the DMO could even reduce it rates further and that given inflation levels most investments made by local authorities are on negative real yields. “I think that will focus people’s minds on other ideas on where to put their money,” he said.

Treasury analyst David Green argued in favour of treasurers investing in corporate bonds, something they have only been able to do since new freedoms were given in April. But a dichotomy exists, he admitted, between the large authorities with the capabilities to research bonds to invest in, and smaller authorities without that capacity. “It’s only going to work for those authorities who have at least one or two full time staff on treasury,” he said. “The more we move toward shared services with a team such as Jonathan [Hunt’s] of four people, you can start to generate that sort of expertise.” Investment in people and systems could generate significant returns through better investing, he added.

Hunt was also an advocate of widening out expertise and investment options. There are two answers to the problem according to him. “The first is ‘ok we won’t invest in it’ and the second is ‘let me spend some more time understanding it then maybe we can invest in it'”, he commented. “I think we need to move to the second part where we need to spend more time learning, understanding and then making rational decisions rather than running scared of something we don’t understand.” Ealing treasurer Bridget Uku questioned the ability of a treasury department to build up the expertise needed to analyse corporate bonds sufficiently. Even a pooled fund of corporate bonds would be beyond her risk appetite, she added.