Arlingclose Investment Benchmarking June 2023 Stuart Jones

Another quarterly Arlingclose Investment Benchmarking has rolled around and some dramatic changes are afoot. It will come as no surprise that local authority portfolios have adjusted to reflect the dramatically different market and interest rate environment that presents itself. Whilst headline grabbing stories of interest rate rises are dramatic and hugely significant for borrowers , investors have stood to benefit from elevated cash rates.

So which investments are benchmarked? The investments in question are solely investments made for treasury purposes, not investments made for services purpose.

Our investment benchmarking offers the opportunity to make comparisons between differing types of authority, from the very large County Councils & Unitary Councils, through to small Parish or Town Councils. The exercise is used to compare within a respective group, but not necessarily influence decision making as each individual authority has differing circumstances.

The most obvious change from last year is the dramatic increase in short duration deposits. Whether that be deposits with the DMO’s DMADF or money market funds. The use of these investments has increased predominantly due to the increase in rates paid by these investments, reflecting in part the increase in the Bank of England Base Rate from 1.25% in June 2022 to 5% in June 2023.

Another significant change has been the decrease in the overall amount of investments held. The amount of internally held investments has fallen by an average of 24% year-on-year. This could be due to several reasons, one of which likely being the increasing use of investment balances in lieu of borrowing at elevated rates. Depending on each LA’s position, this could be the most prudent decision.

Strategic funds have generally declined in capital value over the course of the last 12-months, however the average income return has continued to increase from the pandemic lows. For each fund this will differ, however as a guide the elevated levels of inflation have eroded the value of future cash flows for bond coupon payments, equity dividend payments, and property rental income. As inflation has eroded the value of these future cashflows, the current valuation will fall.

The effect of inflation will differ between fund, and type of fund, as each fund manager adds or removes from the portfolio of assets. For property funds this may depend on the degree to which companies increase rent, equity funds may differ depending on how companies increase prices, and fixed income funds can recoup losses as bonds mature and are replaced with higher yielding instruments.

The average credit score of portfolios has increased , albeit slightly, suggesting a deterioration in credit. This may reflect the worsening credit environment in general as the average credit score of some banks decreased following banking sector issues including SVB, First Republic and Credit Suisse, which will impact on the assets held within money market funds. Also, the deterioration of the average credit strength of local authorities will contribute to this.

Arlingclose will be discussing the investment benchmarking in our weekly webcast TrendingTreasury this week. Please contact to register for this and for if you have any specific queries regarding your investment benchmarking.

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