Plans for a specially-designed, multi-billion-pound fund for local authorities to pool their cash and boost investments returns were being worked up by council chiefs last week.
The custom-built money market fund is the brain child of the Local Government Association and would be tailored specifically for council’s short term cash. The amalgamated pot would allow councils to access rates previously unavailable to them because individually they did not have the required amount to invest.
“The basic principle – that there is scope to use the collective power of £30bn of short term investment more effectively – is unquestionable,” said LGA director of finance & performance Stephen Jones. He added that conversations with banks and fund management groups had been “encouraging.”
An LGA survey carried out in March suggested £600m, about 2%, of local government cash is already invested in money market funds but officials hope a bespoke fund, run by fund managers not councils, could attract significantly more local authority cash.
Some banks with high credit ratings will only accept very high minimum deposits, £50m or more
Stephen Jones, Director of finance and performance, Local Government Association
Existing commercial money market funds vary in size from anywhere between £1bn and £20bn. The size of a fund designed specifically for local authorities would be dependent on demand but it is hoped it would be worth over £1bn, the LGA said.
“If we can get the right type of transparency in the fund, it could well be attractive to councils. Currently, some banks with high credit ratings will only accept very high minimum deposits, for example, £50m or more, or will only accept deposits for longer periods than many authorities typically want to invest,” said Mr Jones.
“Currently, some banks with high credit ratings will only accept very high minimum deposits, for example, £50m or more, or will only accept deposits for longer periods than many authorities typically want to invest.”
The conservative nature of money market funds is seen as one of the major attractions for local authorities as they navigate the post-Iceland investment landscape.
One fund with councils on its books is Henderson Liquid Assets Fund. The £4.5bn fund has 58 local authorities who have invested £383m and Henderson is confident of signing up more.
Fund manager Tony Andrews said 32 of the authorities had signed up since the beginning of the year and attributed this to the cautious investment strategy the fund implements.
“We have always been very cautious,” he said. “We never had any money in Iceland, for example. I do not see why the LGA should not look at creating a fund but our offer matches what they is looking to offer. We would be delighted to talk to them.”
Authorities who invested in the Henderson fund for a year could expect a return of 4% on their investment, although up to 0.15% can be taken in way of a fee by the fund managers.
The move comes just weeks before the first year anniversary of when councils discovered they had close to £1bn worth of investments frozen in stricken Icelandic banks.
The episode led to a re-evaluation of council investment strategies and a flight to safety which saw councils pulling out significant amounts of their money from banks and stashing them with the government’s Debt Management Office (DMO).
However, figures published by the Office of National Statistics (ONS) this week, indicated councils were withdrawing deposits in order pay off debt.
Council investment activity during 2009 Q1
|Total amount withdrawn by councils from banks||£3.85bn|
|Total amount withdrawn by councils from building societies||£2.98bn|
|Total amount deposited with the DMO||£1.08bn|
The ONS statistics revealed councils pulled £3.8bn and nearly £3bn out of banks and building societies respectively in the first quarter of 2009 but only deposited £1.1bn with the DMO.
LGA senior policy consultant Mike Heiser said: “It looks like councils are repaying debt, although we will not get the full picture until the [Department for Communities & Local Government’s] capital figures come out.
“Some might say that given the market conditions last year that is a prudent approach.”
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