(See report at Agenda Item 9 (pages 96 - 111) of the Cabinet papers of 12 July 2016.)
DRAFT RECOMMENDATION
That the revised Treasury Management Strategy 2016-17 be approved.
Minutes:
Mrs Hardwick (Cabinet Member for Finance and Governance), seconded by Mr Dignum, moved the recommendation of the Cabinet. She explained that minor adjustments were required to the Council’s treasury management strategy to reflect the necessary framework changes in the limits etc., as detailed in appendix 1 to the Cabinet report, rather than a complete update in terms of context and the market. This was because the framework of the strategy enabled the treasury team to have the flexibility required to make decisions, taking into account the prevailing market conditions, when considering investment opportunities for the Council’s surplus funds.
For example, it had been the Council’s intention to invest up to £10m in the Local Authority Property Fund. Having placed £5m in the fund in February 2016, it was intended to place a further £5m in May 2016; however in light of the referendum and possible impact on commercial property values, officers held off making further investments in the fund at that time. However, the recommended capital limits would still permit this, if conditions made it appropriate.
Officers were looking at alternative investment opportunities including different pooled funds, such as bond funds or multi-asset funds that had a diversified pool of equity, bond and property exposures. The use of any new investment vehicles would have due diligence undertaken by officers, including taking external advice in order to fully understand the risks attached, and prior approval by the Head of Finance and Governance Services.
The advice from Arlingclose (the Council’s Treasury advisors) regarding the use of the Local Authority Property Fund, was to buy and hold these funds for the long term, so that the income was the main source of return, and the Council had time to ride out the ups and downs of capital values. A formal revaluation of the existing Property Fund investment was currently awaited, and it was likely that there would be a reduction in value. However, the property fund investment was intended to be a long term investment.
Mrs Hardwick added that the Cabinet had asked for a further report later in the year on any significant changes in market conditions that might affect the Strategy. However, she made the following interim statement.
“The economic outlook for the UK has changed significantly following the referendum result. However, the financial markets seem to have stabilised following the initial shock.
“In the short term, the economy is expected to slow due to the uncertainty which is likely due to deferred investment decisions, but the equity markets seem to have remained relatively positive and calmer in the early weeks of July. This might reflect a more optimistic longer term investment horizon, due to evidence supporting the view that trading nations outside the EU such as Australia, New Zealand and China are already making overtures to the UK about establishing trade deals, having been frustrated with the lack of progress with EU negotiations.
“Sterling has depreciated in response to the Governor of the Bank of England indicating that further monetary easing may be necessary in the near future, especially if gilt yields start to rise due to concerns over the UK economy. However, the Monetary Policy Committee did not reduce the Base Rate at its last meeting, which surprised many analysts.
“Officers will be formally reporting the 2015-16 Treasury Management outturn report and the first quarter’s performance for 2016-17 to the September Cabinet meeting. They will also be reporting on whether any changes in the economic climate post-Brexit warrant any further changes to the Treasury Management Strategy.
“It is also worth noting that recent benchmarking of our portfolio compared to other Arlingclose clients, has confirmed that we are well placed for any repercussions due to the referendum outcome.”
Mr Ransley asked that the Cabinet should be reminded of and review the changes approved today, when considering the later report on market conditions, because they allowed officers greater latitude in making investment decisions, and that should be reviewed in the overall context. Mrs Hardwick confirmed this and added that the revised Strategy had also been considered and supported by the Corporate Governance and Audit Committee.
RESOLVED
That the revised Treasury Management Strategy 2016-17 be approved.