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

Investing Public Funds: Where Do We Go From Here?

Posted on Tue, Oct 01, 2013
By Neil Waud, CFA, Senior Portfolio Manager

With U.S. Treasury yields continuing to languish at all-time lows, it may be difficult to see the value in investing public funds at this time. For the past five years, we’ve witnessed events that have shaken our fundamental investment principals to the core. The sub-prime mortgage crisis, Lehman Brothers’ bankruptcy, constraints on the U.S. federal budget leading to the downgrade of Treasury debt, the fiscal cliff as well as the European sovereign debt crisis. All of these events have triggered consequences that were unimaginable not that long ago. Worse yet, none of these issues has been resolved in a manner that gives an investor confidence or clarity going forward.

investing public funds, investment principals

Since the financial crisis began in 2008, central banks have massively expanded their balance sheets in an effort to avert a global economic recession. By offering excess liquidity to the markets, central banks have bought their respective governments time. However, most economists agree that there are limits to what can be repaired through monetary policy. Without sound fiscal policy, it will be difficult for the global economy to gain meaningful traction. The politics involved to enact such change will take time. 

Under these circumstances, it’s no surprise that “safe” assets such as Treasury Bonds, highly rated corporate debt and even gold have seen significant price appreciation since the dawn of the global financial crisis. Due to the meager returns now offered by the Treasury market, an investor must consider the possibility that we are observing yet another “bubble” in the making. When investing in Treasuries, most market participants will agree on the following three things.

1.)  As the financial crisis trudges on Treasury yields can certainly head lower.

2.)  When yields eventually head higher it is going to end badly for many investors who have overly extended their portfolios.

3.) No one has any idea just when the shift to higher rates will occur!

It is this third point that perplexes investors the most. Six years into this crisis, we have slowly come to the realization that we are not observing another typical boom-bust economic cycle. If this were the case, the massive stimulus enacted to spark the economy should have generated GDP growth well above the 2%-3% rate we have observed to date. In reality, we have experienced a period of wealth destruction, credit contraction and asset deflation that has significantly impaired our ability to stimulate the economy through traditional measures. A return to above trend-line growth may still be years away.

investing public funds 

So where does a public investor go from here?

Due to the “bubble” argument outlined above, it is tempting to eschew U.S. Treasuries, Agencies and highly rated corporate bonds of any duration. We believe that would be a mistake. With the benefit of 20/20 hindsight, it is easy to see why avoiding investing has not been a successful strategy over the past few years. However going forward, given the significant headwinds still impacting the global economy, it will be difficult at best to determine the “perfect” time to invest.

The market received a bit of a wake-up call in May when Federal Reserve (Fed) Chairman Ben Bernanke hinted at a possible reduction in monthly bond purchases for Federal Open Market Committee (FOMC) Quantitative Easing program. Since then, the bond market has experienced significant volatility as investors begin to contemplate a world where the Fed gradually tightens monetary policy. Many Wall Street analysts had predicted the Fed to begin tapering bond purchases as early as this September. However, the recent rise in interest rates in conjunction with the looming Congressional budget and debt ceiling debate has apparently given the Fed second thoughts. The Fed has now stated that they would like more time to analyze economic data before reversing course on monetary policy. As a result, the recent action (or inaction) by the Fed has left the markets in a fog. One has to wonder if the Fed still deems the economy so weak that it can’t support itself without unprecedented support from the FOMC.

With no end in sight, how should a prudent investor manage their funds?  We would recommend a disciplined approach, focusing on the long-run by adhering to established benchmarks and patiently capitalizing on perceived opportunities in the market. With a keen eye on the market distortions from the current fiscal and monetary policies, the prudent investor will stay focused on the primary objectives of safety-first, followed by liquidity then yield.

Tags: fixed-income asset management, public investor, Investing Public Funds

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