Public Trust Advisors Blog

What's the Latest in Local Government Investment Pools?

Posted on Tue, Nov 03, 2015

By Greg Wright, President and Matthew Starr, Vice President 

Change is constant in the local government investment pool (LGIP) space, here are some of the recent topics being discussed at Public Trust.

Still All about the Fed?

Were you amongst the optimists who thought the Federal Open Market Committee (FOMC) would make their interest rate move back in March?  If so, then surely you became convinced it was coming in September. Let down twice (or more) by our central bankers, now you are not sure when, or if, an interest rate increase will ever happen. We get it, budget planning is tough enough without the uncertainty surrounding interest rates and when the Fed might execute a 25 basis point increase in the fed funds target rate. Need more guidance?  Let us help, here is the latest Dot Plot in advance of the October 25th FOMC meeting. For a refresher on how to interpret, revisit our blog post from May 2015.

Source: Bloomberg

Public Trust Managed LGIP Rates are on the Rise!

Want some good news? We have some for you, LGIP rates have been increasing. Granted not at a 50-100 annualized basis points clip, but incrementally to the point some LGIP rates are starting to approach 2010 levels again. However, while interest rates are creeping up, these returns are nowhere near the pre-Great Recession yields, for that to happen, we need the FOMC to re-set the target rate.

In addition to the anticipated FOMC rate hike, there are also a number of other factors that impact LGIP rates:

  • Portfolio management style and approach
  • Investment policies
  • Management fees

In our opinion, another key element that promotes higher yields is Public Trust’s ability to operate with greater efficiency and maintain lower operating costs without sacrificing service (or safety). For more information on Public Trust’s approach to LGIP operational efficiency, read a recent white paper. These savings allow us to maintain a competitive management fee and better yields for our LGIP Participants.

Money Market Reform, Not for LGIPs

The United States Securities and Exchange Commission (SEC) Money Market Reform, slated to go into effect in October 14, 2016 will largely constitute a non-factor for the LGIP space.  Remember the SEC does not have purview over local government investment pools. The vast majority of LGIPs are created and operate in accordance with state laws. True there may be similarities in structure, valuation procedures, permitted securities, reporting and oversight between SEC registered funds and LGIPs, but come next fall, LGIPs will not migrate to a floating net asset value, like prime-styled (credit exposure) SEC registered money market funds. Under the reform, government-styled (100% government securities) funds can opt out of the floating net asset value requirement.

Are local government investors that use registered money market funds ready for the accounting requirements and cash-management changes that the new rules bring? Not familiar with new SEC Money Market Rules, read more here. Just remember this, come next October, LGIPs will remain stable dollar funds.

Transparency: LGIPs Reflect Client-Base

Transparency is a cornerstone of good government. Public Trust manages LGIPs and therefore, we need to operate in a manner that serves our clients’ needs. Maybe you have not taken a moment to consider the level of reporting and transparency associated with Public Trust managed LGIPs, well we have. Here is a quick, but important summary of the transparency-related reports available to all of Public Trust’s LGIP Participants via their websites as well as the reporting platform MYACCESS:

  • Daily Rates 
  • Monthly Statements 
  • Portfolio Holdings
  • Newsletters
  • Monthly Fund Analysis 
  • Information Statements
  • Annual Report 

We at Public Trust recognize that financial transparency plays a big part in the overall safety and security of your public funds. As an investor working on behalf of your community, it is essential that you receive a high quality service which can provide you with a variety of tools to assist in your daily responsibilities.  You aren’t allowed to keep secrets from your tax-payers, so Public Trust does not keep secrets from you!

Best regards,

Your Public Trust Staff

 

The views expressed within this material constitute the perspective and judgment of Public Trust Advisors, LLC at the time of distribution and are subject to change. Nothing contained herein should be construed as investment, legal, business, tax or accounting advice. You should consult your own advisors as to such matters and related matters concerning the information provided and its suitability for you. The information contained herein does not purport to contain all of the information that may be required to evaluate any investment options described herein. None of Public Trust Advisors or any of its affiliates make any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein, and nothing contained herein shall be relied upon as a promise or representation whether as to the past, current or future performance. No representation is made as to its accuracy or completeness. It should not be construed as an offer or to purchase/sell any investment.Past performance is not an indicator of future performance or results. Any financial and/or investment decision may incur losses.

Tags: public funds investing, public funds investor, Public Funds Investment, Local Government Investment Pools, public investor, rating agency risk, Money Market Rules, Federal Reserve, LGIP Rates, Publc Trust Managed lgip, The United States Securities Exchange Committee, The Fed, local government investment pool administration, money market funds, financial transparency, LGIP operational efficency, investment advisory services, Investing Public Funds, LGIP Administration, public trust, federal open market committee, Safety and Liquidty, Public Trust Advisors, LGIP investment solutions, SEC, FOMC

Mitigating Rating Agency Risk for LGIP Services

Posted on Mon, Aug 31, 2015

By Chris Toney, Director and Todd Alton, Vice President, Credit Research

Mitigating Rating Agency Risk for LGIP Services

Here we are, over a half-decade removed from The Great Recession, the second greatest financial calamity in our country’s history. Much has changed, and will continue to change. In our opinion, the fall-out will continue to reverberate for years to come, just as the Great Depression defined a prior generation’s financial regulation, e.g., the Securities Act of 1933, the creation of the Securities and Exchange Commission, and the Investment Company Act of 1940. To our frequent readers, you may recall that we at Public Trust Advisors have recently written of both the intended and unintended impacts of the Dodd-Frank Wall Street Reform and Consumer Protection Act, this generation’s hallmark financial regulation affecting the financial services industry and public funds investing.      

One of the least discussed aspects of both Dodd-Frank and the credit crisis are the impacts made to the Nationally Recognized Statistical Rating Organizations (NRSRO). Post-recession, the NRSROs are now held to a higher standard and their reputations are under more scrutiny than ever before. In our opinion, these events have led the NRSROs to err on the side of caution, resulting in a far greater number of negative outlooks and ratings downgrades for corporations and governments alike.

Public trust advisors, LGIP, LGIP management, seperatly managed accounts

The Public Trust Advisors Perspective

Currently, Public Trust Advisors manages a number of local government investment pool (LGIP) portfolios which are rated AAAm by Standard & Poor’s and in order to maintain these ratings the portfolios must contain securities rated in the highest rating categories by Standard & Poor’s. Essential to maintaining the AAAm ratings, Public Trust Advisors in our role as Investment Advisor, is keenly aware of this situation and vigilant toward any possible negative rating actions.

For Public Trust, the greatest concern is not the default of a credit in the portfolio. The greatest concern is rating agency or NRSRO risk. So what is “rating agency risk?” Rating agency risk is the risk that an issuer is suddenly downgraded by one of the NRSROs to a level below the highest rating category. This scenario could force portfolio management to sell a security at an inopportune time when the pricing of the security would most likely be negatively impacted due to a rating agency downgrade.

LGIP Management, LGIP services, Public trust advisors, seperately managed accounts

Monitoring Change; Avoiding Downgrades

To avoid possible downgrade scenarios, the Public Trust credit team is diligent with regards to headlines and market signals related to the approved issuers for its portfolios. Daily monitoring through Bloomberg provides any rating change, including negative outlooks or watches that portend possible downgrades.

For example, in recent years several “pillar banks” (global money center banks) have enjoyed the highest credit ratings (A-1+ short-term ratings), due largely to their ability to avoid many of the pitfalls during the global financial crisis. In our opinion, some of their success can be attributed to heavy reliance on commodity based economies, specifically energy, oil and mining, since these industries experienced growth and price appreciation while other industries, such as the mortgage market were facing decline.

In light of the recent collapse of commodity prices (namely crude oil) the rating agency opinions of these pillar banks with commodity exposure are evolving toward a more negative stance. The commodity-driven economies (e.g. Australia, Canada) are inevitably going to slow and the rating agencies are now more concerned about systemic support or lack thereof for the pillar banks.

As we monitor and contemplate these changes, the Public Trust credit and portfolio management teams have reduced our exposures to the pillar banks in order to mitigate the ratings agency risk associated with any potential downgrades. This involves reducing the hold times (hold codes) of these banks and performing higher due diligence around the sectors, and issues for each bank.

Whether it be an individual security or issuer, or ever-changing economic cycles, our foremost concern and commitment is focused on safeguarding the principal of the LGIP Participants by applying a higher standard of care through all of our actions.

                                                                                               

To download our most recent whitepaper, please click below. 

   Public Funding, Investing public funds, LGIP, local government investing pools
  

Tags: public funds investing, public funds investor, Public Funds Investment, Local Government Investment Pools, public investor, rating agency risk, Investing Public Funds, LGIP Administration

Short-term Interest Rates: The Dot Plot Explained

Posted on Wed, May 27, 2015

By Joe Carroll, Vice President, Sales and Marketing

 

Short-term Interest Rates: The Dot Plot Explained

The Federal Open Market Committee (FOMC) is a twelve member committee consisting of members of the Federal Reserve Board and regional Reserve Bank presidents. The FOMC has eight regularly scheduled meetings throughout the year to discuss and assess economic and financial conditions, monetary policy, and risks to its long-run goals of price stability and sustainable economic growth.

One aspect of these meetings which garners a lot of attention is the dot plot. The dot plot is a visual representation of where each member of the FOMC thinks the federal funds rate should be at the end of each of the next three years and into the future (long run). While the dot plot is not an official tool of the FOMC, it does provide some insight as to what various members of the FOMC are thinking in regards to the federal funds rate.

Here is a picture of the March 18th FOMC meeting dot plot chart.

Dot Plot Blog 1

Each dot represents where individual members of the FOMC think the federal funds rate should be at the end of the year given current economic information. As seen above, the views on where the federal funds rate will be in the future varies quite a bit within the FOMC. For example, in 2016 the majority of the FOMC believes that the federal funds rate should be between 1.5% and 2.0%. There are a few members who think the rate should be much higher or lower than the consensus at the end of 2016.

Further examination of the dot plot provides even more insight into the thought process of the FOMC. The chart below shows the past three dot plot assessments along with the respective Fed Funds Futures contracts. The Fed Funds Futures contracts (seen in red) represent how the market is pricing the federal funds rate in the future. Noticeably, the market is not quite as optimistic as the FOMC. In addition to lower market expectations of the federal funds rate, it is clear that all the members of the FOMC have reduced their outlook for future interest rate levels.

Dot Plot Blog 2

The dot plot can be an insightful and useful tool when examining the federal funds rate and future projections. With recent changes in the FOMC language, we are expecting an increase in the federal funds rate sometime in 2015. Short-term interest rates have been at record lows for years. An increase in interest rates, and therefore interest income can mean a significant change for many local governments. The time for budgeting zero interest income may be coming to an end! Be sure to keep an eye out for the next dot plot and what it means to you.

 

Charts Sourced from Bloomberg

Tags: public funds investing, investment advisor, Short-term interest rates, fixed-income asset management, yield, public funds investor, Public Funds Investment, Local Government Investment Pools, safety, Investing Public Funds, LGIP Administration

What the Fed Said: Staying the Course...

Posted on Mon, Nov 03, 2014

By Neil Waud, CFA, Senior Portfolio Manager

Investing Public Funds: What the Fed Said - Staying the Course

The Federal Open Market Committee (FOMC) concluded its two day meeting last week. In the wake of recent volatility stemming from global growth and geopolitical concerns, the markets were bracing for the FOMC to take a more dovish tone when compared to the September 17th meeting. However the FOMC generally stayed the course by ending the QE3 program and noting significant progress in regards to the Committee’s long run goals of stable prices and a maximum rate of employment. The federal funds rate remains targeted at 0% to 0.25%, and will remain low for a “considerable time.” The stock market and bond prices were modestly lower after the announcement.

The vote today was not unanimous. Voting against today’s decision was Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, believing that the continued sluggishness in the inflation outlook warranted a continuation of the Fed’s asset purchase program.

 investing public funds, Investing Public Funds, public funds investing, public funds investor, public trust, safety, yield

Tags: public funds investing, yield, public funds investor, safety, Investing Public Funds, public trust

Short-term Interest Rates: Standing at the Crossroad?

Posted on Tue, Aug 19, 2014

By Neil Waud, CFA, Senior Portfolio Manager

For more than five years, the Federal Reserve (Fed) has assured the markets that short-term interest rates would stay exceptionally low “for some time.” At first this pledge seemed to be just a broad based promise. Then it became linked to specific calendar dates, economic thresholds and formal interest rate projections. With the labor market showing meaningful signs of improvement, inflation firming and the risk of financial imbalances growing, the Fed may now be at a crossroads. Although members of the Federal Open Market Committee (FOMC) have recently voted unanimously in favor of current monetary policy action, internally there appears to be a growing discord regarding the future path of short-term interest rates.

Short-Term Interest Rates

Given the Fed’s progress towards its dual mandate of maximum employment and stable prices, it is reasonable to question whether or not the Fed’s extraordinary measures in regards to monetary policy are still appropriate. For example, the unemployment rate has fallen to 6.1% in June, a level the Fed had not expected to see until the end of 2014 or 2015 at the earliest. As the labor market tends to be a lagging indicator, this could be used as evidence that the Fed is falling behind the curve by keeping short-term interest rates too low for too long. The idea that a rapid drop in unemployment could push inflation well above the Fed’s target may be gaining traction and sparking a debate among members. Non-voting member St. Louis Fed President James Bullard recently stated “If macroeconomic conditions continue to improve at the current pace, the normalization process may need to begin sooner rather than later.”

Fed Chairwoman Janet Yellen seems less convinced that short-term rates should rise anytime soon. During congressional testimony in July, she reiterated that the Fed should continue to press on as “significant slack” remains in the labor market and that inflation remains below the Fed’s comfort zone. Pointing to slow wage growth and dismissing the recent data on inflation as “noisy,” the Chairwoman would like to be absolutely sure the economy is on solid ground before raising interest rates. Despite several years of false starts and a horrid first quarter economic growth, this patient approach may still have its detractors. There are growing concerns that the Fed’s zero-interest-rate-policy has encouraged investors to take on greater risk and has narrowed credit spreads to historically low levels. Chairwoman Yellen has even recently noted that pockets of the market such as social media stocks and high yield bonds have valuations that appeared “substantially stretched."

For better or worse, due to an increase in regulation and unprecedented support from central banks around the world, we are in a much different place than we were at the time leading up to the 2008-2009 Global Financial Crisis. The Fed now stands at the crossroad, evaluating the risks versus rewards of continuing on with its extraordinarily accommodative monetary policy. The new direction may not be clear yet, but the Fed may be closer to ending its low rate assurances than many believe. As we all know, when coming to a crossroads, it is important to get your bearings, to check your orientation, and understand which way to head in order to successfully reach your final destination.

So if indeed we are at a crossroads for interest rates, could you go either way or would you want a little more information and conversation in order to choose the best direction forward? We’d love to help you chart your course….

 

Public Trust Advisors

Tags: public funds investing, public funds investor, Local Government Investment Pools, Investing Public Funds

Subscribe via E-mail

Latest Posts

Posts by category