Room151’s recent Local Authority Treasurers Investment Forum (LATIF) provided lively debate over Brexit, councils’ commercial property purchases and general investment returns. David Green gives his overview of events.
I recently had the privilege of attending the 10th Local Authority Treasurers’ Investment Forum at the London Stock Exchange, organised by Room151.
Coming from a scientific background, I love a normal distribution. It is always reassuring at these events to see most local authorities in the middle on a range of subjects, with a few outliers always deviating from the mean.
This metaphor held true on subjects as diverse as Brexit and regulatory reform.
The day started with CCLA chief executive Michael Quicke giving his overview of local authority investment activity based on the the 2018 Room 151 Treasury Investment survey.
Most respondents continue to earn less than 1% interest a year and forecast their balances are going to fall.
But a few see their investment levels rising and presumably these were also the ones taking a longer-term view and receiving income above 2% as a result.
One continuing trend is the move away from bank deposits due to bail-in risk and low returns, with low-risk local authority loans and high-returning property funds being the main beneficiaries of this move.
Hetal Mehta from LGIM and Karen Ward from JP Morgan both gave their views on Brexit, which will undoubtedly be the main driver of the UK economy – and hence interest rates – for some years to come.
The mathematician in me particularly enjoyed LGIM’s “decision-tree” which showed that most roads lead to some type of soft Brexit – the 90% probability reached by the model aligned pretty well with a show of hands in the audience.
But the reminder that there are still four EU leaders’ summits in the calendar before 29 March gives plenty of opportunity for delayed decisions and the accidental no-deal exit – a “fat tail” risk on the minds of a minority of delegates and panel members.
Elsewhere at LATIF, the strategy and technical panels were unusually lively, given the dry subject matter.
Mike Jensen from Lancashire worried that Brexit could cause the next UK recession, and is setting a strategy to avoid unsecured bank deposits and deal with the impact of negative interest rates.
Joseph Holmes from Winchester and my colleague Phiroza Katrak both advised using the new capital strategy report as an opportunity to have a dialogue with elected members over risk and return, enabling them to have an overview of what officers do in their name.
The day’s excitement peaked when Innes Edwards from Edinburgh and Danny Mather from Warrington took to opposite corners of the ring to discuss the pros and cons of commercial property investments, in a very gentlemanly way of course.
Referee Chris West asked the audience to score the bout, but delegates also had mixed opinions and there was not even any clarity in the room on the meaning of “borrowing in advance of need”.
Gareth Caller from the Ministry of Housing, Communities and Local Government remained quiet in the audience as the panel discussed his new investment and MRP guidance.
However, he did suggest that government will review how effective the new guidance is at meeting its objectives, and that further steps could be taken in future if thought necessary.
He also questioned the extent to which treasury managers are properly involved in commercial investment decisions or whether they are merely asked to go and borrow the money at the end of the process.
Finally, we received some useful insights into the investment markets from those closest to them.
Deborah Cunningham from Federated Investors gave us a useful reminder of why a AAA fund rating is not the same as a AAA bond rating, and explained how money market fund managers investigate credit strength rather differently to the rating agencies.
David Oliphant from Columbia Threadneedle explained why active fund management is so important in the bond markets – a passive equity strategy means investing in the most successful companies, but a passive bond strategy is lending to firms with the most debt.
Nathalie Coffre from Amundi gave us an insight into short-dated corporate bonds and explained the relatively high returns available from this part of the yield curve.
And Nigel Jenkins from Payden & Rygel reminded us that economic forecasts are often quite wrong, but that didn’t stop him suggesting that UK interest rates are likely to rise a little faster and further than the markets expect!
So let me extend my thanks to Peter Findlay and the Room 151 team for putting on another excellent conference, to Chris West and Tim Seagrave for superb chairing and especially to all the sponsors for paying for our day at the Stock Exchange.
David Green is Strategic Director at Arlingclose Limited
