Treasury Think Tank 2015: Risk appetite, bail-in reaction and MMFs
0Investment diversification, bail-in regulations, challenger banks, and money market fund reform all featured in this year’s Room151 Treasury Think Tank.
Treasury officers gathered in London to explore the big issues affecting current treasury management strategies. The meeting heard some councils have placed money with challenger banks and invested in instruments as exotic as solar bonds. Elsewhere, treasury chiefs acknowledge a willingness to take on more risk while bail-in regulations was forcing them to diversify their investments portfolios.
Q. What is the risk appetite of current treasury management strategies?
Danny Mather:
Two years ago we were the first authority to invest in a property fund and that’s done brilliantly for us. It’s appreciating and it’s earning great returns. Last year we dipped our toe in the water with challenger banks. It was in our strategy, so we made some small investments again and they performed very, very well … within our strategy this year we want to increase our exposure to challenger banks.
We’re trying to develop an ethical investment policy. …We started to invest in solar bonds, about £2m, in September last year, and it’s earning us a tremendous yield. We’ve done a quite extensive due diligence and we think it’s actually one of our safe investments – more than the mainstream banks. We’re currently in the process of investing another £10m in three solar farms and bond issues. On the borrowing side as well, we’re also members of the LGA Bond Agency and … hopefully we’ll take a big chunk of that.
Phil Triggs:
At the last audit and governance committee … it was pointed out to me that in every single treasury document since the Icelandic bank crash, Iceland has featured prominently. As one of the councillors said: “It’s just a hangover, when are we going to stop beating ourselves up, move away from this, take on some more risk?” I think it’s time to do that. …I plan to mention Iceland no longer in any document. In terms of taking on risk, I think we turned a corner and treasury strategies from now on will start to look more adventurous.
Miriam Adams:
Fortunately Merton was not affected by Iceland, but traditionally we have been very conservative in terms of our instruments.. …We’re are taking some steps in our strategy of expanding the number of instruments, and the type of instruments, we intend to use and we’ve been very clear … so that members are well informed about them. The reason for that is, should we need them, or should the market take a detour, perhaps after an economic blip, then we are well positioned to use these instruments for our strategy.
Jonathan Hunt:
We’re not looking at challenger banks, mainly because in order to get a meaningful return on something you need to put a reasonable deposit size with them and, as a percentage … that it’s too big a sum in headline terms.
So we’re tending to actually look at a fairly broad range of listed investments be it gilts, t-bills, commercial paper, certificates of deposits – all of the stuff that’s normally held by custodians. …I think the main area we’re going to be looking at actually is maturities and just taking out longer terms, possibly not more than five years, but then starting to put a sensible chunk out to five.
Q. What’s uppermost in your mind when considering investment strategies?
Carl Rushbridge:
We’re in quite an unusual phase at the moment. We amassed more cash than we normally have as a result of some disposals, and what we’re now looking at is quite a significant sized estate strategy, over the next five years, so we know we’re not going to need some of that cash for one, two, three years.
I inherited a strategy that was very much under 12 months and what I’m now trying to do is introduce an element of, “Well what do we do over 2-3 years?” But there’s a lot of uncertainty around where the market’s going to go within the next six months. So it’s a very difficult balance to say, do we make some two year decisions now and then look foolish, not quite Icelandically foolish, in some six months time? Or do we hold fire until post election, have a look and see what happens in three months and then start to lay things out for a longer period?
Karsan Varsani:
As a business [it’s about] looking at the sources of cash and how long it’s available for and what it is for, how much
can we afford to put out in a certain investment framework, have we got capacity to absorb market volatility and over what time frame are we framing investment positions?
We’ve introduced more flexibility, recognised the risks that are in credit, recognised the risks that are in duration. We’ve expanded the range of counterparties to reduce idiosyncratic risk, increased our exposure to quasi-sovereign and supra national areas.
Stephen Bevis:
We had a political administration that lasted for 14 years, we’ve just changed that. There’s a keenness, and a desire, to open up our strategy. …We’ve been looking at certificate of deposits using them quite extensively and money market funds.
Q. What has been the reaction to the EU’s bail-in regulation and what’s your attitude to UK banks
Iain Millar:
I think Barnet has retained a fairly prudent treasury management and investment strategy for some time. Bail-in is a risk we’re aware of. We have used diversification to manage that risk and although we have access to more counterparties, and investment classes, we haven’t used them yet.
Amir Mota:
I’d say bail-in as a topic is important to all investors who manage cash but I’d say local authorities, as a sector, have been more focused on it and more ahead of the curve. It’s definitely a conversation I have every time I speak to a local authority, and naturally our response would be to look at money market funds for diversification, look at short duration bond funds to help you with those capacity needs.
Dom Piper:
It was perhaps a little unhealthy before how much onus was put on the potential of a government bail out. So, when we look at the way that we’ve always rated banks – a little bit below some of the rating agencies because we looked at banks on stand-alone basis – it is perhaps a little healthier now the way that some of those credits are considered.
In terms of other instruments, I would throw some of the corporate names into the mix … A lot of these entities are treble B because they don’t aspire to be anything over and above. As long as you do your credit analysis then there’s a place for those credits.
John Wood:
In terms of bail-in, our adviser has effectively reduced the amount of money they recommend we leave with banks quite considerably. So that is probably the single biggest change for us in treasury this year. They recommended a maximum of 15% in a bank, and it’s gone down to 5 %.
Victoria Worsfold:
We’ve reduced the amount we can have as a hard limit with banks for unsecured deposits …Over the last 12 months we’ve been reducing some of our investments in the banks and introducing greater diversification so we haven’t got such a massive hit if one of the banks comes off our list.
It’s definitely an issue in local authorities because we tend to rely heavily on advisers and information from brokers… That’s a common theme across local authorities. We don’t have teams doing this sort of thing, so we do have to rely on the resource that are available…
Amir Mota:
UK banks are stronger, and they’re improving, but you still need diversification across your investment portfolio. Bail-in regulation has increased the need for that. But, when you look at local authority cash balances over the years, I think about £30bn last time we checked, a lot of that is with those four usual suspect banks; which is a concern. What we’ll see over the next five years, due to Basel III and bail-in regulation, balances will come away from those banks and move into other products.
Q. What are the prospects for money market funds?
Dom Piper:
We’ve seen it play out in the US already … variable NAV (net asset value).
It’s not a forgone conclusion that European regulation will go the same way but it would be prudent for treasurers to prepare themselves for that kind of movement.
Anything that is implemented is going to take a long time. You’re probably looking at somewhere between 12-18 months before implementation, so there doesn’t need to be a knee-jerk reaction, even when legislation is formalised.
On the positive side of things, whatever happens it’s not affecting the way a portfolio is managed, the way in which a money market portfolio is managed. It’s likely to just be a change in accounting principles. When you move to variable NAV you’re just looking at the mark to market rather than amortising every security that you have.
And actually when you invest in our funds, and some of our competitor’s funds, we put the mark to market up on the website as well so you can see that relationship already. So you are talking extremely low volatility versus the stable there.
Jonathan Hunt:
The accounting point is actually one that’s well made because there is accounting difference at the fund level but then, actually, how does the local authority account for it in its books and on its treasury recording systems? … It’s quite a lot of detail as to how that’s going to play through into local authority accounting.
Miriam Adams:
From an accounting [point of view] it is quite plain that they are cash and cash equivalents and there’s no big deal on the investment side. What is apparent is if there is a conversion to a variable NAV there is a responsibility to really understand the investment strategy behind [it].
This event was made possible with the assistance of J.P. Morgan Asset Management.
Participants:
Iain Millar, head of treasury, London Borough of Barnet
Stephen Bevis, accountant (strategic treasury and VAT) Cambridge City Council
Pamela Rust, treasury manager, Cambridgeshire Police
Victoria Worsfold, senior accountant (treasury management & capital) Guildford Borough Council
Miriam Adams, treasury & insurance manager (interim), London Borough of Merton
Karsan Varsani, London Borough of Southwark
John Woods, head of treasury and pensions, Staffordshire County Council
Phil Triggs, strategic finance manager, (pension fund and treasury), Surrey County Council
Danny Mather, corporate finance manager, Warrington Borough Council
Jonathan Hunt, director of corporate finance & investment, trip-borough director for treasury and pensions, Westminster Council
Carl Rushbridge, chief finance officer, Sussex Police & Crime Commissioner
Dom Piper, managing director, global liquidity, J.P. Morgan Asset Management
Amir Mota, vice president, global liquidity, J.P. Morgan Asset Management
Marna Marx, vice president, global liquidity, J.P. Morgan Asset Management
Gavin Hinks, editor, Room151.co.uk
Peter Findlay, publisher, Room151.co.uk