CABINET 22 OCTOBER 2015

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1 TREASURY MANAGEMENT REPORT 2015/ Summary 1.1 To inform Cabinet of the investment performance of the Council s internally and externally managed funds to 30 September To update the Treasury Indicators for the six months to 30 September RECOMMENDATIONS 2.1 That Cabinet notes the investment performance of the Council s funds. 2.2 That Cabinet notes the half-year position of the Council s Treasury Indicators. 3. Background and Discussion 3.1. The Chartered Institute of Public Finance and Accountancy s Treasury Management Code recommends that members are informed of Treasury Management activities at least twice a year. This report therefore ensures this authority is embracing Best Practice in accordance with CIPFA s recommendations The Council s Treasury Management Strategy for 2015/2016 was approved by GAC on 23 February The Council has borrowed and invested substantial sums of money and is therefore exposed to financial risks including the loss of invested funds and the revenue effect of changing interest rates. This report covers treasury activity and the associated monitoring and control of risk The Council became indebted on 28 March 2012 following the introduction of the Housing Self Financing regime. The Council originally borrowed m from the PWLB; in total seven loans were borrowed at an average weighted interest rate of 2.4% and average weighted duration of years. The debt stands at m as at 30 September The details of the individual loans can be found at paragraph As at 30 September, the Council s investments totalled 79.47m, 34.96m of which was managed by external fund managers; the internally invested funds comprised 5m in certificates of deposit, 19.5m in fixed term deals and 20.01m invested overnight in deposit accounts and money market funds A large range of financial instruments are now in regular use, however the returns available, whilst holding security and liquidity as the prime considerations, remain low.

2 3.7. Investment Activity In House Investments The first table below shows the change in investments since the start of this financial year, whilst the second table details each in house investment and shows its maturity date. Balance on 31/03/2015 Balance on 30/09/2015 Increase/ Decrease in Investments Comments Overnight Investments (5.25) Short Term Investments Total in-house funds invested (4.25) Bridge Development outflow and semi-annual repayment of borrowing Investments in Pooled Funds (0.77) Market valuation TOTAL INVESTMENTS (5.02) Details of in house investments Start Date Institution Investment Maturity Date Interest Rate Overnight Investments ¹ Santander UK plc 5.00 n/a 0.50% Barclays Bank plc 1.50 n/a ³0.32% Blackrock (MMF) 3.51 n/a 0.46% Insight (MMF) 5.00 n/a 0.44% Standard Life (MMF) 5.00 n/a 0.49% Sub total: Overnight Investments Short Term Investments 13/07/2015 Lloyds Bank /10/ % 15/07/2015 Nationwide BS /10/ % 23/07/2015 Helaba (Landesbank /10/ % Hessen-Thuringen) 03/08/2015 Barclays Bank plc /11/ % 26/05/2015 Commonwealth Bank of /11/ % Australia 04/06/2015 CD ² Standard Chartered /12/ % 07/07/2015 CD Standard Chartered /01/ % 29/09/2015 DBS Bank Ltd /12/ % 23/09/2015 CD Standard Chartered /03/ % Sub-total: Short Term Investments Total in-house funds invested 44.51

3 ¹ All overnight investments are liquid, in that there is no period of notice required, the only restriction is there are specified cut off times during the day after which the funds will not be received until the next working day. The interest rate quoted for the Money Market Funds (MMF) are for the 30 th September 2015, rates for MMF are quoted daily after the close of business. ² CD is a Certificate of Deposit. There is a secondary market for these instruments which means they can be sold should the funds be required. These are held on behalf of the Council by through King and Shaxson s dealing and custody arrangements. ³ This is the lower rate of interest, for sums invested for 12 months this rises to 0.5% 3.8 The Council s treasury advisers (Arlingclose) monitor counterparty credit quality constantly and forward details of all changes immediately. The counterparty credit quality was assessed and monitored with reference to Credit Ratings (the Council s minimum long-term counterparty rating of A- (or equivalent) across rating agencies Fitch, S&P and Moody s), credit default swaps; GDP of the country in which the institution operates; the country s net debt as a percentage of GDP; bank resolution regime mechanisms, share price. Arlingclose also provide monthly comprehensive updates as to counterparty credit but it always remains the responsibility of the Council to decide whether or not to use their advice. As part of his delegated authority, the Managing Director decides whether to include or exclude an institution and whether to restrict the amount or timescale of an investment to an institution. 3.9 Cash flow at the beginning of the year was buoyant and a large inflow in May 2015 of just over 9.5m for the sale of a plot at the Bridge development meant that total internal investments rose to 59.68m. A payment of just under 11m was agreed and sent to Prologis in August in respect of their payment due for the Bridge Development and this together with the semi-annual repayment of borrowing ( 2.2m) bought the investment levels down to where they are now There was an operational breach in September 2015 when a payment was made when a redemption was due. This resulted in the Lloyds current account being overdrawn by 495k for the night. Monies were returned first thing the next day and procedures have since been reviewed to ensure that settlement errors do not happen again Externally Managed Funds The total value of the externally managed funds was 34.96m as at 30 th September 2015, a decrease in valuation of 0.77m over the close

4 of accounts figure at 31 March However, since 1 st April 2013, the funds are showing an overall gain of just over 600k. The Council has been paying close attention to the fluctuations in these funds as nine of the funds have seen downward valuations since the start of the financial year. Equity markets initially reacted positively to the pickup in the expectations of global economic conditions, but were tempered by the breakdown of creditor negotiations in Greece. Chinarelated stock market turmoil in August and September resulted in falls in the major equity indices (FTSE 100 and FTSE All Share and MSCI World Index). Some improvement was seen in the latter half of September although indices have not recovered to their previous levels. Government and corporate bond markets were also volatile during the six months to September primarily over the uncertainty of the timing of interest rate rises by the US Federal Reserve. However, the nature of these funds is that they will fluctuate both up and down and performance is usually measured over a longer horizon (three years). Most of the funds are not giving any cause for concern at this time, but the Managing Director maintains a close watching brief to ensure their performance remains within the Council s risk threshold and meet the Council s investment objectives over the 3 year time horizon. All external funds are currently held as accumulation funds with income earned automatically reinvested in the fund. Profits or losses in funds are only realised if the unitholding is sold. Changes in fund values are reflected annually in the Available for Sale Reserve account, in line with proper accounting practice. In 2018/19 the way the Council accounts for the pooled funds will change. The Council currently follows the IAS 39 accounting standard but this will be replaced by IFRS 9. There will be a new way of classifying financial assets and as a result, the new classification of pooled funds will require a change to their accounting treatment. Under IFRS 9 the fair value of the pooled fund will be taken through the profit or loss account. This will mean that unrealised gains and losses previously taken to the Available for Sale Reserve Account will be taken to the Finance Income & Expenditure account and hence will impact upon the General Fund. However, there may be an option to retain accounting for such investments very close to current rules. The impact of these changes will be considered further once more detail is received. Funds in the Royal London Cash Plus will be switched from accumulation to income (distribution) units. The switch will enable interest to be earned gross of tax. The Council is also considering investing up to 2m in the CCLA property fund, the Local Authorities Property Fund. The fund invests directly in property and pays out the income it receives. Its

5 performance since 2010 has been good, although as would be expected it suffered between 2007 and 2009 during the economic recession. The table below details the individual values of the external funds as at 30 September 2015; FUND / (TYPE OF FUND) Aberdeen Absolute Return Bond Fund (an absolute return bond fund investing in utilising duration, credit and foreign exchange strategies and aiming for improved risk-adjusted returns) City Financial Defensive Global Bond Fund (a global fixed income fund investing in government and corporate bonds and cash instruments) Standard Life (Ignis) Short Duration Cash Fund (a low volatility short-dated bond fund investing in short-term fixed income and variable rate securities) Insight Liquidity Plus Fund (a low volatility cash plus fund investing in short-term fixed income and variable rate securities) Investec Short Dated Bond Fund (a government bond fund investing in shortdated securities of highly rated sovereign nations) Investec Diversified Income Fund (a bond and equity fund with an emphasis on providing income) M&G Global Dividend Fund (a global equity income fund investing in corporates with potential to grow their payout to shareholders consistently over time) Payden Sterling Reserve Fund (a short-dated bond fund managed against a capital preservation objective). Payden & Rygel Absolute Return Bond Fund invests in a diversified, multi-sector portfolio of government, corporate, securtised and emerging-market debt. Royal London Cash Plus Fund (a low volatility cash plus fund investing in cash deposits, money market instruments and short-dated government securities) Royal London Duration Hedged Credit Fund aims to achieve outperformance from corporate bonds, while using derivatives to protect against interest rate risk. Schroders Income Maximiser Fund (an equity income fund investing in equity and equity-related securities of UK companies) Threadneedle UK Equity Income Fund (a UK equity income fund invested in shares of small, medium and large companies in the UK Amount invested at 31/03/2015 Market Value as at 30/09/15 Variance April September (0.010) (0.045) (0.111) (0.264) (0.020) (0.114) (0.100)

6 and which can also invest in other securities such as convertibles and gilts) Threadneedle Strategic Bond Fund (a bond (0.025) fund investing in investment grade and high yield fixed income instruments) UBS Multi Asset Income Fund (a global bond (0.113) and equity income fund spread across classes, which include fixed income investment grade and high yield corporate bonds, equities, real estate, mortgage backed securities). TOTAL EXTERNAL FUND INVESTMENTS ( 0.768) 3.12 Borrowing As has been previously reported, the Council borrowed m to fund the Housing Self Financing regime on 28 th March At the time of borrowing, it was possible to set the instalment dates to suit the Council s cash flow. 1 st February and 1 st August were chosen and the three payments of principal (where applicable) and interest have been made. The table below shows the current position of outstanding debt of m. Loan Type Maturity Date Years to Maturity Principal Borrowed (28/03/12) Principal Outstanding (30/09/15) Interest Rate % Semiannual repayment Maturity 01/02/ % EIP 01/02/ % EIP 01/02/ % EIP 01/02/ % EIP 01/02/ % EIP 01/02/ % EIP 01/02/ % % There has been no overnight/short term borrowing since 1 st April Should it be required to borrow new loans, the Council has been eligible to apply for new loans from the Public Works Loans Board (PWLB) at the PWLB Certainty Rate (0.2% below the PWLB standard rate). This eligibility is for a 12 month period from 1 st November A regular review will take place in respect of redemptions for each loan as rises in interest rates could lead to financial advantage in respect of early redemption.

7 3.13 Projected Outturn for 2015/2016 The average interest rate achieved on internal investments is 0.50% for the financial year to date, and interest received to date on internal investments is 103K. There is a further 48K of accrued interest on investments already made, and therefore it is anticipated that the budget of 150K will be exceeded Treasury Indicators The Council can confirm that it has complied with its Treasury Indicators for 2015/16, which were set in the budget report to the General Assembly of the Council on 23 February 2015 as part of the Council s Treasury Management Strategy Statement. Details are as follows: Security: The Council has adopted a voluntary measure of its exposure to credit risk by monitoring the long-term credit rating and will aim for a weighted average long-term rating of A for its in-house managed cash balances placed with credit rated banks and building societies and, as applicable, MMFs. Portfolio average credit rating (in-house managed cash balances) Target Actual A A+ Liquidity: The Council has adopted a voluntary measure of its exposure to liquidity risk by monitoring the amount of cash available to meet unexpected payments within a rolling one month period, without additional borrowing. Total cash available within 1 month Target 5m Since the1st April 2015 the Council had at least 5m available within one month at all times. Interest Rate Exposures: This indicator is set to control the Authority s exposure to interest rate risk. It represents the maximum level (as a percentage) of the Council s investment and borrowing that will be invested at either a fixed or variable rate of interest. All of the Council s long-term debt is at fixed rates of interest and, therefore, interest rate rises will not have an adverse impact on the budgetary position. The Council considers its investments to be at variable rates of interest.

8 Upper Limit for Fixed Interest Rate Exposure Compliance with Limits: Upper Limit for Variable Interest Rate Exposure Compliance with Limits: Approved Limits for 2015/16 100% Yes 100% Yes Maturity Structure of Fixed Rate Borrowing This indicator is to limit large concentrations of fixed rate debt needing to be replaced at times of uncertainty over interest rates. It is designed to protect against excessive exposures to interest rate changes in any one period, in particular in the course of the next ten years. Maturity structure of fixed rate borrowing Lower Limit for 2015/16 % Upper Limit for 2015/16 % Actual Maturity % as at 30/09/2015 Actual Fixed Rate Borrowing at 30/09/2015 under 12 months 0% 10% 6.22% months and within 24 months 0% 10% 6.22% months and within 5 years 0% 25% 18.67% years and within 10 years 0% 40% 33.71% years and within 20 years 0% 40% 31.15% years and above 0% 20% 4.02% Total % Upper Limit for Total Principal Sums Invested Over 364 Days The purpose of this limit is to contain exposure to the possibility of loss that may arise as a result of the Authority having to seek early repayment of the sums invested. Approved upper limit of principal invested beyond 364 days 30/09/15 Actual Internally Managed Funds 20m 0 Externally Managed Funds 45m 34.96m

9 3.15 Economic Background and Outlook This has been provided by the Council s treasury advisers, Arlingclose and can be found at appendix A. 4. Relationship to the Corporate Plan Council Performing Strongly Theme PS1 this the robust management of the Council s day to day finances, enabling it to meet its financial obligations to all stakeholders by offering a high quality, value for money service. Regular monitoring and scrutiny of the Council s financial position, and, in particular its treasury management function is key to maintaining a sound financial strategy. 5. Financial, legal, staffing and other administrative implications and risk assessments Financial Implications Legal Implications Staffing Implications Administrative Implications Risk Assessment As detailed in the report There are none as a result of this report There are none as a result of this report There are none as a result of this report Treasury operations are tightly regulated and the Council s external advisors consulted regularly, thus minimising the risk to the Council. A prudent approach is taken in relation to investment activity with priority being given to security and liquidity over yield. 6. Details of Exempt Information Category Not applicable 7. Appendices Appendix A Economic Update provided by Arlingclose BACKGROUND PAPERS Documents consulted Date / File Ref Report Author Section and Directorate Exempt Information Category Banking 2015/2016 Catherine Bailey (01322) Financial Services, Internal Services N/A