investment strategy – review initial briefing and recommendations james parker 12 th may 2014...

Investment Strategy – ReviewInvestment Strategy – Review

Initial briefing and recommendationsInitial briefing and recommendations

James Parker 12James Parker 12thth May 2014 May 2014

Note: I have NO training as a financial Note: I have NO training as a financial advisoradvisor

© Bishop’s Stortford Town © Bishop’s Stortford Town Council Council

Investment ChallengeInvestment Challenge

Cash balances follow a sawtooth Cash balances follow a sawtooth between 1.5M & 1M made:between 1.5M & 1M made:

General reserves :~600k (region a)General reserves :~600k (region a) Earmarked reserves: ~400k (region a)Earmarked reserves: ~400k (region a) Working funds: 0-500k (regions B & C)Working funds: 0-500k (regions B & C)

Little/no scope to increase returns in Little/no scope to increase returns in regions b & c regions b & c

Region c is managed through COIF – return Region c is managed through COIF – return approx 0.35%approx 0.35%

Region b is managed through a notice Region b is managed through a notice account (currently Lloyds 95 day) – return account (currently Lloyds 95 day) – return approx 0.7%approx 0.7%

Returns from region A (reserves) Returns from region A (reserves) might be increased if we accept might be increased if we accept increased riskincreased risk

Currently invested in a restricted range of Currently invested in a restricted range of term accounts in accordance with risk-averse term accounts in accordance with risk-averse policypolicy

Return 0.85%-1.5%*, new investments Return 0.85%-1.5%*, new investments currently return 1.5%, average 1.2%currently return 1.5%, average 1.2%

CPI currently 1.6% -> annual real terms cost CPI currently 1.6% -> annual real terms cost of retaining capital = £6750of retaining capital = £6750

This is significantly better than in Q1/2010 This is significantly better than in Q1/2010 when the current policy was first created, when the current policy was first created, principally because CPI has fallenprincipally because CPI has fallen

* depending on rates on offer at date of investment* depending on rates on offer at date of investment© Bishop’s Stortford Town © Bishop’s Stortford Town Council Council

Investment PolicyInvestment Policy

Current Policy (Adopted September 2012)Current Policy (Adopted September 2012) ““The Council adopts a risk-averse approach to investment. Investments may be made in:The Council adopts a risk-averse approach to investment. Investments may be made in:

Cash deposits (including term deposits) with major banks headquartered in the UKCash deposits (including term deposits) with major banks headquartered in the UK Cash deposits (including term deposits) with UK Mutual SocietiesCash deposits (including term deposits) with UK Mutual Societies Government Bonds (Gilts)Government Bonds (Gilts) Public Sector Deposit Fund managed by COIF “ Public Sector Deposit Fund managed by COIF “

““The Council will not normally invest inThe Council will not normally invest in EquitiesEquities Corporate bondsCorporate bonds Banks not headquartered in the UK or UK subsidiaries of banks not headquartered in the UKBanks not headquartered in the UK or UK subsidiaries of banks not headquartered in the UK Other financial instruments”Other financial instruments”

““The Council will not invest with banks which are not headquartered in the UK even though they may The Council will not invest with banks which are not headquartered in the UK even though they may have a major operation in the UK. Specifically this excludes Santander. This decision is based on the have a major operation in the UK. Specifically this excludes Santander. This decision is based on the Council’s assessment of the likelihood of a UK government backed rescue should a bank get into Council’s assessment of the likelihood of a UK government backed rescue should a bank get into financial difficulty.”financial difficulty.”

Possible extensionsPossible extensions Cash deposits with higher risk financial institutionsCash deposits with higher risk financial institutions Equities (Shares) or derivativesEquities (Shares) or derivatives Corporate bonds or derivativesCorporate bonds or derivatives PropertyProperty

Additional option to considerAdditional option to consider Pay down pension debtPay down pension debt

Ruled out: Pay down our property loans Ruled out: Pay down our property loans Penalties result in negative returnPenalties result in negative return

DCLG recommendation is: Security – Liquidity – Yield DCLG recommendation is: Security – Liquidity – Yield in that order in that order © Bishop’s Stortford Town © Bishop’s Stortford Town Council Council

Option 1: Higher risk financial Option 1: Higher risk financial institutionsinstitutions

Risk: Institutional InsolvencyRisk: Institutional Insolvency Current Best within policyCurrent Best within policy

Saffron Walden BS 1.5% 1 year bond Saffron Walden BS 1.5% 1 year bond Example rates with out-of policy organisationsExample rates with out-of policy organisations

Bank of Cyprus: 1.60% - 1 year, 1.90% - 2 years, 2.15% - 3 yearsBank of Cyprus: 1.60% - 1 year, 1.90% - 2 years, 2.15% - 3 years United Trust Bank: 1.60% - 1 year, 2.05% - 2 years, 2.25% 3 years, United Trust Bank: 1.60% - 1 year, 2.05% - 2 years, 2.25% 3 years,

2.75% - 5 years.2.75% - 5 years. Co-op bank: 1.50% - 1 year.Co-op bank: 1.50% - 1 year.

These are what is currently availableThese are what is currently available Restricted choice when existing funds mature can force us to Restricted choice when existing funds mature can force us to

choose lower rate fundschoose lower rate funds Note that Town & Parish Councils Note that Town & Parish Councils do not do not benefit from the benefit from the

FSCS compensation schemeFSCS compensation scheme


Option 2 – Shares (Equities)Option 2 – Shares (Equities)

Risk: Shares may go up or downRisk: Shares may go up or down Control of exit date surrendered and/or risk of Control of exit date surrendered and/or risk of

capital losscapital loss Management optionsManagement options

Professionally managed individual holdingsProfessionally managed individual holdings Index Tracker or other ‘fund’Index Tracker or other ‘fund’ Self-managed (not competant)Self-managed (not competant)

75% of managed funds underperform 75% of managed funds underperform index!index! Source – Vanguard UK, however this figure is Source – Vanguard UK, however this figure is

quite frequently quotedquite frequently quoted© Bishop’s Stortford Town © Bishop’s Stortford Town Council Council

Shares – What’s the risk?Shares – What’s the risk?


FTSE All Share – gross annual capital gain over fixed period (1 & 2 Years)

FTSE All Share – gross annual capital gain over fixed period (5 & 10 Years)

The Marketing Story: Manipulated by choice of start date to show positive return at all times

Closer to the truth?

Over 2 years – ~37% risk of making a loss/negligible gainOver 10 years, ~20% risk of making a loss/negligible gainNote; figures exclude both dividend income and fees/charges => broadly comparable to low charge tracker fundOn average shares returned inflation+6% during 1900-1999

Conclusion with an equity investment:(1)plan for 5-10 years +

(2) accept loss of control of exit date +/- 5 years (you might have to wait through very nervous times)

Options 3 & 4: Corporate Bonds & PropertyOptions 3 & 4: Corporate Bonds & Property

Corporate Bonds: Commercial fixed term IOUs Corporate Bonds: Commercial fixed term IOUs Pay interest (for historical reasons called ‘the coupon (rate)’)Pay interest (for historical reasons called ‘the coupon (rate)’) PurchasePurchase

on secondary market at current trading value - higher or lower than face on secondary market at current trading value - higher or lower than face valuevalue

In a basket with other bonds (managed fund)In a basket with other bonds (managed fund) RedemptionRedemption

On expiry of term (1-20years) On expiry of term (1-20years) at face valueat face value at any other time on secondary market at current trading valueat any other time on secondary market at current trading value

Forced redemtpion (“call”)Forced redemtpion (“call”) Sometimes the issuer can insist they buy back earlierSometimes the issuer can insist they buy back earlier

RisksRisks Insolvency of issuerInsolvency of issuer Capital loss if sale price less than purchase priceCapital loss if sale price less than purchase price

RewardReward On average bonds returned inflation + 1.4% 1900-1999, but this hides very On average bonds returned inflation + 1.4% 1900-1999, but this hides very

significant variationssignificant variations Further study neededFurther study needed

Property – Residential (buy to let) or CommercialProperty – Residential (buy to let) or Commercial Not yet investigated, long term investment returning incomeNot yet investigated, long term investment returning income


Summary/ConclusionSummary/Conclusion

Current risk-averse policy costs about £6750 annually in real termsCurrent risk-averse policy costs about £6750 annually in real terms When policy created the annual real terms cost was £32,000, so the situation has improved materiallyWhen policy created the annual real terms cost was £32,000, so the situation has improved materially Best rate for newly invested money is 1.5% currently, CPI is currently 1.6% annuallyBest rate for newly invested money is 1.5% currently, CPI is currently 1.6% annually Sacrifices yield in return for security and liquiditySacrifices yield in return for security and liquidity

Alternative options - sacrificing security and/or liquidity in favour of yieldAlternative options - sacrificing security and/or liquidity in favour of yield Higher risk financial institutions offer up to x% for 2 years or y% for 4 yearsHigher risk financial institutions offer up to x% for 2 years or y% for 4 years

Risk: insolvency, difficult to quantifyRisk: insolvency, difficult to quantify Shares offer higher rates of return (~6% above inflation?)Shares offer higher rates of return (~6% above inflation?)

investment over 5-10 years investment over 5-10 years perhapsperhaps ~20% risk of capital loss unless control of exit date is surrendered and we have guts through ~20% risk of capital loss unless control of exit date is surrendered and we have guts through

downtimesdowntimes Bonds and property have not yet been fully investigatedBonds and property have not yet been fully investigated

Bonds offer more modest returns on average (~1.4% above inflation?)Bonds offer more modest returns on average (~1.4% above inflation?) Property not yet investigated, need to consider commercial vs residentialProperty not yet investigated, need to consider commercial vs residential

Paying down our pension debt a serious optionPaying down our pension debt a serious option effectively investing in a basket of professionally managed shares/bondseffectively investing in a basket of professionally managed shares/bonds

RecommendationRecommendation No change at present timeNo change at present time If possible quantify pension debt and pay-down optionsIf possible quantify pension debt and pay-down options If Council has appetite for risk, complete investigation of corporate bonds & propertyIf Council has appetite for risk, complete investigation of corporate bonds & property Review at next meetingReview at next meeting


investment strategy – review initial briefing and recommendations james parker 12 th may 2014...

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