Report to: Cabinet 23 June 2015...At 31 March 2015 the council had cash investments of £163.3...

Report to: Cabinet

Portfolio holder presenting: Cabinet

Member for Finance and Resources

23 June 2015

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Subject: Treasury Management Annual Report 2014/15

Status: Open

Ward(s): All

Key Decision: No

Key Decision Ref:

Report Of: Cabinet Member for Finance and Resources

Contact:

Kevin Jaquest – Direct Line (01256) 845513 Ext 2513

Email: [email protected]

Dean Pletts – Direct Line (01256) 845506 Ext 2506

Email: [email protected]

Appendices:

Appendix 1 – Treasury Management Income 2014/15

Appendix 2 – Investment Holdings

Appendix 3 – Benchmarking (Risk and Return)

Appendix 4 – Valuation of Bond Holdings

Appendix 5 – Compliance with Strategy Limits and Prudential Indicators

Appendix 6 – Investment Criteria (active at 31 March 2015)

Papers relied on to produce this report

None

SUMMARY

1 This Report

1.1 This report shows the activity within the council’s treasury management function for the year ending 31 March 2015.

1.2 This summary contains the information required for members to discharge their responsibilities for the monitoring of the treasury management function. Detailed information in support of this summary is contained in the main body of this report.

1.3 In accordance with the Local Authority (Capital Financing and Accounting) Regulations 2003 the council is required to have regard to the Treasury Management Code of Practice. The code requires the council to receive three treasury management reports during the annual cycle: a strategy report prior to the start of the year; a mid-year report; and an annual report after the end of the year.

1.4 At over £3 million in 2014/15, interest earnings from investments are a very important source of income in enabling the council to achieve its corporate priorities.

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mailto:[email protected]

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1.5 The key points to note on the performance for this year are as follows:

Overall Impact on Income (£412,000 Adverse Variance)

Net interest and investment income was £3.088 million before the use of reserves, compared to the original estimate of £3.500 million. This was £412,000 less than estimated. A breakdown of the variance is shown in Appendix 1.

The shortfall was not unexpected and has been reported throughout 2014/15 and would normally be met by a contribution from the Interest Rate Risk Reserve which was set up specifically to deal with in year variances in accordance with the council’s financial policies. However, as there is a significant outturn surplus within the rest of the council’s budget the shortfall will be met from this surplus.

The reason for the shortfall was primarily due to assumptions made at the time of the original estimate relating to the timing of long term and the use of external fund investments. In particular: Investment in external funds was made later than forecast in

2014/15 and for a lower amount than originally estimated, resulting in £580,000 less income than expected.

The resulting shortfall in income from external funds was partially offset by increased income of £66,000 from additional short term investments which were held for a longer period than expected prior to the investment in external funds.

An additional investment in gilts was made in March 2014 after the production of the estimate. This additional investment resulted in additional income of £81,000 in 2014/15.

Despite the overall shortfall compared to expected returns the council has continued to outperform its benchmarked peers on Treasury Management investments. According to benchmarking results the council’s investment return remains one of the highest in the country and more than double the average for local authorities and this was achieved with one of the lowest levels of credit risk.

Overall Position of the Investment Portfolio and Returns

At 31 March 2015 the council had cash investments of £163.3 million having started the year with investments of £147.1 million. Details of total investments held at 31 March 2015 can be seen in Appendix 2.

The overall return for the year was 1.90% compared to the original estimate of 2.28% and an average base rate of 0.50%.

Average balances invested during the year were £162.0 million compared to the original estimate of £153.8 million mainly due to delays in spending the capital programme, unexpected capital receipts and revenue service underspends.

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Changes to Investment Criteria

The council continued to maintain a low level of credit risk in the portfolio through its investment criteria. Adjustments to the criteria are made during the year based on changes in risk indicators and on advice from Arlingclose Limited (the council’s treasury advisors). Details of the changes made to the investment criteria during the year can be seen in section 12 of this report.

Compliance with Policy, Strategy Limits and Prudential Indicators

All transactions complied with the council’s agreed policy statement, treasury management strategy limits, treasury management practices and all accounting codes of practice.

All types of investments remained within the agreed strategy target ranges and approved prudential indicator limits and the council complied with its Capital Financing Requirement (the need to borrow to finance capital expenditure) and its Minimum Revenue Provision (MRP) requirement (the need to set aside funds to repay debt).

1.6 This report does not require a decision but is to be noted in accordance with the council’s constitution, treasury management practices and accounting codes of practice.

1.7 Detailed information in support of this summary is contained in the remainder of this report.

2 Recommendation

2.1 It is recommended that Cabinet recommends Council to note:

2.1.1 The Treasury Management Annual Report for 2014/15 which includes the Prudential Indicator Actuals for 2014/15

2.2 That the Capital Financing Requirement and the Minimum Revenue Provision requirement are both nil.

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PRIORITIES, IMPACTS AND RISKS

Contribution To Council Priorities

This report accords with the Council’s Budget and Policy Framework and supports the development of an effective and efficient council.

GLOSSARY OF TERMS

Term Definition

Certificates of Deposit These are very similar in nature to term deposits, they are only issued by banks and unlike term deposits they are tradeable.

Corporate Bonds These are very similar in nature to gilts except that rather than being issued by the Government they are issued by other organisations eg banks and commercial companies in order to raise capital.

Counterparties These are the organisations responsible for repaying the Council’s investment upon maturity and making interim interest payments. The Counterparties used by the Council are highly credit worthy banks, building societies, local authorities or corporations.

Debt Management Agency Deposit facility (DMADF)

A facility run by part of the HM Treasury which accepts deposits at fixed rates for periods up to 6 months.

Gilts (Treasury Bonds) These are issued by the UK Treasury in order to finance public expenditure. Gilts are generally issued for a set period and pay a fixed rate of interest for that period. At the end of the set period the investment is repaid (at face value) by the Treasury. However, during the life of a gilt it will often be traded (bought and sold) at a price decided by the market.

Local Authority Bonds Similar to gilts, these are issued by some UK local authorities rather than the Treasury in order to raise capital.

Diversified Credit Funds Externally managed pooled investment schemes investing in wide ranging mix of credit instruments including Gilts, Corporate Bonds, Investment Grade Credit, Asset Backed Securities, Senior Mortgages, Leverage Loans and High Yield Bonds.

Money Market Funds Externally managed pooled investment schemes investing in short term cash instruments.

Enhanced Cash Funds Similar to Money Market Funds but containing cash instruments with a longer duration to enhance the yield.

Term Deposits These are loans to banks, building societies or other counterparties which are for a fixed period and at a fixed rate of interest.

T-Bills (Treasury Bills) These are short dated, tradeable instruments issued by the UK Treasury that are purchased at a discount. Whilst no interest is paid the discount results in a capital gain that is the effective yeild.

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MAIN CONSIDERATIONS

3 Background Information

3.1 Treasury management in local government is governed by the Chartered Institute of Public Finance and Accountancy (CIPFA) Code of Practice on Treasury Management in the Public Services and in this context is concerned with “the management of the council’s cash flows, its banking and its capital investments; the effective control of the risks associated with those activities and the pursuit of optimum performance consistent with those risks”.

3.2 The council has adopted the code and complies with its requirements, one of which is that interim operational reports are provided to members and that mid-year and annual reports are presented to full Council on the treasury management activity each financial year.

3.3 The council’s treasury management policy objectives are:

To invest prudently having regard to the security of investments. To maintain liquidity in the investment portfolio to meet the council’s

spending plans. To aim to achieve the optimum return on investments commensurate

with the proper levels of security and liquidity and predictability of returns.

To minimise the cost of any temporary borrowing (which may be required for day to day cash flow reasons).

3.4 In accordance with the code of practice the first objective is deemed to be the primary objective and the others are secondary considerations.

3.5 In February 2015 the council approved the addition of a statement on the council’s approach to ethical investment within the council’s policy statement for 2015/16. Although this part of the policy was not effective until 1 April 2015, it was applied with immediate effect for all current and new investments from February 2015.

3.6 The code also requires that local authorities have a separate body or committee responsible for the monitoring and scrutiny of the treasury function. The council has delegated this responsibility to the Audit and Accounts Committee.

3.7 The Head of Resources is required under the Prudential Code of Practice to report the actual prudential indicators to the council at the end of each financial year.

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4 Financial Market Conditions

4.1 In order to understand and put in context the performance of the council’s investment portfolio, it is necessary to appreciate the key changes in the interest rate environment and the market’s assessment of credit risk (the risk that an investment will default and will not be repaid).

4.2 The Bank of England held the UK Bank Rate at 0.50% throughout the year despite some earlier anticipation in the markets that a rate rise might have occurred. Gilt yields fell significantly during the year due to a combination of falling inflation and worries over global economic growth despite much improved growth here in the UK. Renewed concerns over deflation in European economies prompted the European Central Bank to begin a programme of quantitative easing which contributed to further downward pressure on gilt yields into 2015.

4.3 The credit risk environment remained relatively stable during the year although the implementation of banking reform legislation meant that banks would be much less likely to receive government support in times of financial stress and investors and depositors would be much more likely to bear the costs of any rescue. By the end of the year the council had greatly restricted its use of banks as a result.

4.4 The following chart shows the movement in interest rates during the year.

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Interest Rates 2014/15

10yr Gilt %

5yr Gilt %

12-month rate %

3-month rate %

7-day rate %

Bank Rate %

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5 Treasury Management Activity during 2014/15

5.1 At the beginning of the year the council had cash resources, represented by the investment portfolio, of £147.1 million. These rose to a peak of £169.9 million during the year before falling to £163.3 million at the end of the year. The average balance during the year was £162.0 million.

5.2 A detailed breakdown of the investment portfolio as at 31 March 2015 showing the names of the counterparties, their credit ratings and the amounts invested can be seen in Appendix 2.

5.3 Below is a summary of activity during the year to date:

INVESTMENT PORTFOLIO ACTIVITY (at cost)

Holding Investments Investments Holding

31/03/14 Made Realised 31/03/15

Investments £'000 £'000 £'000 £'000

Government Gilts 57,953.3 0.0 (8,970.8) 48,982.5

Local Authority Bonds 4,059.5 0.0 0.0 4,059.5

Corporate Bonds 4,089.0 0.0 0.0 4,089.0

Long Term Fixed Deposits 17,000.0 0.0 0.0 17,000.0

Diversified Credit Funds 0.0 20,000.0 0.0 20,000.0

Short Term Deposits 63,951.0 306,560.7 (301,375.2) 69,136.5

Total Investments 147,052.8 326,560.7 (310,346.0) 163,267.5

5.4 The council made new long term investments to the value of £20.0 million during the year (see table below).

NEW LONG TERM INVESTMENTS MADE (at cost)

Date Investment Name Number of Amount

shares £'000

01-Dec-14 M&G Alpha Opportunities Fund 97,892.55 10,000

04-Dec-14 M&G Total Return Credit Investment Fund 99,874.20 10,000

Total 197,766.75 20,000.00

5.5 Long term investments originally costing £9.0 million matured during the year (see table below).

LONG TERM INVESTMENTS REALISED

Date Counterparty

Original

Cost

Premiums

Amortised

Written

Down

Value

Disposal /

Maturity

Proceeds

Gain /

(Loss)

£'000 £'000 £'000 £'000 £'000

22-Jan-15 UK Treasury (Gilts) 8,970.8 29.2 9,000.0 9,000.0 0.0

Total 8,970.8 29.2 9,000.0 9,000.0 0.0

5.6 No short term borrowing was undertaken during the year as part of daily cash

flow management.

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6 Changes to the Investment Portfolio

6.1 The charts below show the changes during the year to the investment portfolio by comparing the percentage of the portfolio that was invested in the different types of instrument used since the beginning of the year:

Government Gilts39%

Other Bonds6%Bank Deposits

24%

Local Authority Deposits

11%

Money Market & Cash Funds

20%

Investments 31/03/14 £147.1m

Government Gilts30%

T-Bills12%

Other Bonds 5%

Bank Deposits 9%


14%

Money Market & Cash Funds

18%

Diversified Credit Funds

12%

Investments 31/03/15 £163.3m

6.2 The main changes since the beginning of the year were the use of diversified credit funds and a reduction in the amount deposited with banks. Treasury Bills were added to the portfolio to accommodate the increase in short term cash balances at the highest credit quality available.

6.3 At 31 March 2015 the council had 42% of its investments in tradable, highly liquid government backed assets (gilts and treasury bills) and a further 17% combined in local authority deposits and bonds.

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7 Investment Portfolio Benchmarking

7.1 The council takes part in a quarterly investment benchmarking service provided by its treasury management advisors, Arlingclose Ltd. This highlights the effect of changes in the council’s internally managed investment portfolio and compares the council against other Arlingclose clients on the basis of size of investments, length of investments and the amount of credit risk being taken. The results of the quarterly client benchmarking at 31 March 2015 are shown in Appendix 3.

7.2 The graphical format used for the benchmarking can be interpreted with reference to the diagram below.

High

Low risk / High return High risk / High return

(optimal position) (risk rewarded)

Low risk / Low return High risk / Low return

(risk averse) (worst position)

Low

Low HighCredit Risk

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7.3 Typically, the council would aim to be in the top left corner of the chart where a higher return is achieved for less risk. The most recent benchmarking results show the council with a return well above the “best fit” or “linear trend line” of all other authorities measured.

7.4 It should be noted that the benchmarking shows a snap-shot of the average running yield on internally managed investments held including short term cash. Investments managed by external fund managers are not included. It shows the council’s running yield at 2.01%. This differs from the annual performance for the investment portfolio due to returns from investments that are held and mature throughout the course of the year.

7.5 At 31 March 2015 the average credit rating of the internally managed investment portfolio was approximately AA (risk score 2.7), on a value weighted basis and AA+ (risk score 1.9) on a time weighted basis, which indicates that less credit risk is being taken with longer term investments. The average period to maturity was 1.73 years.

7.6 Although the council’s interest and investment income has reduced over recent years the benchmarking results do demonstrate that its returns are still more than double those of many other local authorities. These returns are also being achieved whilst taking a much lower amount of indicated credit risk than most other authorities as defined by the average credit risk scores.

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7.7 The council also takes part in the CIPFA Treasury Management Benchmarking club. The results for the year to 31 December 2014 (currently awaiting results to 31 March 2015) show that the council has one of the highest returns for combined investments at more than twice that of the average for the other club members. This benchmarking process does not take into account any measure of investment risk taken but focuses instead on investment returns.

8 Value of Bond Holdings

8.1 The market value of the council’s bond holdings as at the 31 March 2015 was £59.0 million and included an unrealised gain of £4.5 million when compared to the written-down book value. Details of which can be seen in Appendix 4.

8.2 The council’s gilt holdings have very reliable market prices due to an active market for these securities. The local authority bonds and the Lloyds Bank bonds which the council holds are less actively traded on the bond market due to their relatively small issue sizes and limited availability.

8.3 Changes in market prices are not a major issue for the council as bonds are purchased with the intention of holding them until maturity.

8.4 A valuation gain represents the amount of future income, over and above prevailing rates, that will be obtained by holding a bond until its maturity. The difference between the yield at which the bond was purchased and the prevailing market yield for the same bond, over the remaining life of the bond, will be approximately equal to the valuation gain in each case. On this basis current valuation gains are indicative of the strong yields booked into the council’s portfolio in previous years when compared to yields currently available in the marketplace.

9 Investment Performance Compared to Original Estimate

9.1 A summary of the performance of investments is shown below:

INVESTMENT PERFORMANCE SUMMARY for 2014/15

Estimate Actual

2014/15 2014/15

In-house Investments

Long Term (1 Year +) 3.30% 3.22%

Short Term (up to 1 Year) 0.50% 0.50%

External Investments

Diversified Credit Funds (Income returns) 2.90% 2.72%

Diversified Credit Funds (Total returns) 4.50% 2.96%

Enhanced Cash Funds 0.50% 0.77%

Money Market Funds 0.50% 0.40%

Average Overall Return 2.28% 1.90%

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9.2 Long term investments achieved an average return of 3.22%. The original estimate for the year was to achieve an average return of 3.30%. The return was affected by a long term investment made in 2013/14 after the production of the original estimate. The new investment had a yield lower than that of existing long term investments at the time.

9.3 Short term funds managed by the council in-house achieved an average return of 0.50% in line with the original estimate of 0.50%.

9.4 Externally managed funds include the M&G Alpha Opportunities Fund and the M&G Total Return Credit Investment Fund in which £20 million was invested in November and December 2014. Income paid to the council from these funds generated a return of 2.72% compared to an estimate of 2.90%. The total return, which takes into account the change in the capital value of the fund holdings as well as the income paid, was 2.96% compared to an estimate of 4.50%. The nature of these funds means that returns are expected to be more volatile than the council’s other investments and therefore more difficult to estimate in advance on an annual basis. The stated aim of the funds is to provide a gross return of 3 to 5% above 1 month LIBOR (London Interbank Offered Rate) over a rolling 3 year period.

9.5 Other externally managed funds used by the council primarily in order to provide cash liquidity were Money Market Funds and Enhanced Cash Funds. These were both estimated to return 0.50% but returned 0.40% and 0.77% respectively.

10 Compliance with Strategy Limits during 2014/15

10.1 As part of the strategy for 2014/15 approved by Council on 27 February 2014, limits were set for different types of investment. During the year the average holding in each type of investment compared to the strategy limits is shown below:

Average Average Strategy

Holding Holding Limits

2014/15 2014/15 2014/15

Type of Investment £m % %

Long Term (Fixed Deposits/Bonds/External Funds) 88.1 54% 0-95%

Short Term (Cash Deposits/External Funds) 73.9 46% 5-100%

Total 162.0 100%

10.2 All types of investment have remained within the agreed strategy and limits during the year and a breakdown of the investment portfolio as at 31 March 2015 compared to the strategy limits is shown in Appendix 5.

11 Prudential Indicator Limits

11.1 Under the prudential capital finance system the council determines, at a local level, its capital expenditure and borrowing provided that it can demonstrate that its plans are affordable, prudent and sustainable. Under the Prudential Code of Practice there is a statutory requirement to set, monitor and report Prudential Indicators and Limits.

11.2 The Prudential Indicator Limits relating to treasury management and the compliance with those limits are set out in Appendix 5.

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11.3 The fixed and variable rate exposure limits allow the council to manage the extent to which it is exposed to changes in interest rates and the limit for amounts invested beyond a year was set at £122 million and ensures that the council keeps enough short term cash for operational purposes at all times.

11.4 The Head of Resources is required under the Prudential Code to report to council the 2014/15 actuals for the following non-treasury management prudential indicators.

Actual capital expenditure - for 2014/15 was £21,470,152.

Actual ratio of financing costs to net revenue stream – for 2014/15 was minus 19%.

Actual external debt - as at 31/03/15 was £66,400.

Actual net borrowing - as at 31/03/15 was minus £163,201,100 (this figure is negative because the council has net investments rather than net borrowing).

Actual capital financing requirement - as at 31/03/15 was nil.

Actual minimum revenue provision requirement – as at 31/03/15 was nil.

11.5 The purpose of the ratio of financing costs to net revenue stream is to identify what proportion of net revenue costs relate to the financing of debt. However, as the council has large investments and no long term debt, the ratio is negative and shows that interest income is the equivalent of 19% of the council’s net revenue expenditure.

11.6 External debt is made up of borrowing and other long term liabilities. Parish council deposits with the council were £66,400 and are deemed to be temporary borrowing.

11.7 Net borrowing is the difference between borrowing (£66,400) and investments (£163,267,500). This represents net investments for the council.

11.8 The capital financing requirement is the council’s underlying need to borrow to finance capital expenditure that has not been financed by its own resources. As all of the council’s capital expenditure has been financed through the use of capital receipts and contributions or through revenue reserves, the capital financing requirement is nil as is the minimum revenue provision requirement (i.e. the council’s need to set aside amounts to repay borrowing).

12 Changes to the Investment Criteria

12.1 Selecting suitable investment criteria within the limits set by Council is the responsibility of the Head of Resources.

12.2 During the year new long term investments could be made using government issued bonds (Gilts), supranational bonds with AAA credit ratings or deposits or bonds with other local authorities or Registered Social Landlords (housing associations).

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12.3 Short term investments could be made using Treasury Bills, other Local Authorities, AAA rated money market funds and the HM Treasury’s Debt Management Agency Deposit Facility. Use of highly rated banks was allowed and the council operated a select list of those available, which was monitored for any risk indicators on an on-going basis.

12.4 The use of collective investment funds was also approved for short term investments with funds approved for use specialising in fixed income; short term cash; and diversified credit. Following consultation with the council’s advisors, which ensured that funds were consistent with the council’s treasury management policy objectives, investment into diversified credit funds began in November 2014.

12.5 In April the investment criteria were updated to reflect the approved strategy for 2014/15 which set the overall counterparty limits and added some non-UK bank names. Also during April the maximum allowable maturity limits were increased for Santander to three months and Lloyds/Bank of Scotland to nine months after reviewing updated guidance from the council’s treasury advisors, Arlingclose.

12.6 In May the RBS money market fund was removed from the list after it merged with and was absorbed into Goldman Sachs’ money market fund.

12.7 In September the Royal London Cash Plus Fund was added to the list of available cash funds.

12.8 In October the decision was taken to reduce the maximum potential investment term for new loans to banks and building societies on the council’s approved investment criteria. The maximum loan period was reduced from twelve months to six months. This adjustment was made following changes in credit and economic indicators and in accordance with advice from Arlingclose.

12.9 In December the credit rating for Standard Chartered Bank was updated to reflect an S&P rating downgrade to A+ from AA-.

12.10 The approved investment criteria that were active at 31 March 2015 are shown in Appendix 6.

13 External Service Providers

13.1 Arlingclose Limited is appointed to provide treasury management advice and the council is clear as to the services Arlingclose provides under the contract and is also clear that responsibility for treasury management remains with the council.

13.2 KMPG Investment Advisory is appointed to act as an advisor on asset allocation and fund manager selection and fund manager performance monitoring in respect of the council’s long term investment strategy.

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14 Training

14.1 The treasury management code of practice requires the Head of Resources to ensure that all members tasked with treasury management responsibilities, including the scrutiny of the function, have access to appropriate training relevant to their needs and understand fully their roles and responsibilities.

14.2 Treasury workshops are provided for members of the Audit and Accounts Committee and are open to all members of the council. The workshops are delivered by a combination of external training providers, council officers and Arlingclose Limited.

14.3 Officers responsible for treasury management attend external workshops and seminars as part of their continued professional development and the officer responsible for the day to day treasury management holds the Association of Corporate Treasurers’ Certificate in International Treasury Management – Public Sector.

15 Significant Events Since the Reporting Date

15.1 There have been no significant amendments to the investment portfolio since 31 March 2015 and all investment sums due to mature since the reporting date have been received as expected.

16 Financial Implications

16.1 All of the activities and returns in this report culminate in a financial impact on the council’s interest and investment income. An analysis of the interest and investment income compared to the original estimate for 2014/15 is shown in Appendix 1.

16.2 The net effect of all of the activities was a reduction of interest and investment income of £412,000 compared to the original estimate.

16.3 In accordance with the council’s financial policies, the shortfall in income would normally be met from the Interest Risk Reserve which would then need to be replenished by way of a first call on any outturn surplus reported in the council’s revenue monitoring outturn report for 2014/15.

16.4 As there is a significant outturn surplus reported for 2014/15 the shortfall in interest income will be met directly from the outturn surplus rather than appropriations in and out of the reserve.

17 Risk Issues

17.1 There are considerable risks associated with investments. The main risks are credit risk (the risk of default by the counterparty) and interest rate risk or market risk (the risk that interest rates in the financial markets will move adversely).

17.2 The investments in diversified credit funds have an increased exposure to credit risk in order to generate enhanced returns, but reduce the council’s exposure to interest rate risk. This additional exposure to credit risk is managed by external fund managers who have the necessary expertise and resources to ensure that only an appropriate level of risk is taken.

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17.3 Returns from these externally managed funds are expected to be more volatile than returns from the council’s internally managed investments and there is the possibility that the value of the investment could reduce in the short term. Therefore the fund holdings should be seen as medium to long term investments with a 3 to 5 year time horizon.

17.4 All investment risks are constantly monitored and are also reviewed annually along with all the other risks as part of formulating the council’s annual Treasury Management Strategy.

17.5 The significant risks relating to Treasury Management are recorded on the council’s Corporate Risk Register with details of how these risks are mitigated.

18 Human Resources Issues

18.1 None identified.

19 Equalities Issues


20 Legal Implications


21 Communications and Consultation

21.1 None required.

22 Conclusion

22.1 From an investment perspective, the interest rate environment has remained challenging during the year and the indications are that this is set to continue. The council addressed this by implementing a recent addition to the approved strategy, specifically investment in diversified credit funds for a portion of the council’s investment portfolio. These funds are expected to provide an enhanced return when compared to the council’s other existing investments.

22.2 Although below initial expectations, total investment returns this year still compared favourably with peers in the results of treasury management benchmarking services which showed that this council consistently achieved a higher return at a lower level of risk than almost all others.

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Appendix 1

TREASURY MANAGEMENT INCOME for 2014/15

Original

Estimate Actual Variance

2014/15 2014/15 2014/15

£'000 £'000 £'000

Interest and Investment Income

Interest from Long Term Fixed Investments 2,856 2,937 81

Interest from Externally Managed Funds 853 273 (580)

Interest from Short Term Cash Investments 225 291 66

Miscellaneous Interest Received 17 17 0

Amortisation of Premiums on Bonds (Capital) (14) (14) 0

Amortisation of Premiums on Bonds (Non-capital) (433) (424) 9

Total Interest and Investment Income 3,504 3,080 (424)

Interest Paid (18) (6) 12

Appropriations (Reserve Movements)

From Capital Adjustment Account for Premiums on

Bonds (Capital) 14 14 0

Total Income for Treasury Management 3,500 3,088 (412)

Use of Reserves

Use of Interest Rate Risk Reserve (council policy) 0 412 412

Interest Income Supporting Revenue Budget 3,500 3,500 0

( ) denotes an adverse variance

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Appendix 2

Investment Holdings as at 31 March 2015

Type of Investment

Credit

Rating

Rating

Agency Maturity Date

Cost

Amount (£)

Gilts

UK Treasury 4.75% Aa1 Moody's 07/09/2015 4,476,000







48,982,554

Local Authority Bonds

City of Leicester 7.00% Not Rated N/A 25/01/2019 976,100

City of Salford 7.00% Not Rated N/A 25/01/2019 976,100

Dudley MBC 7.00% Not Rated N/A 01/02/2019 976,100

LAB Investments 7.125% Not Rated N/A 18/02/2019 1,131,208

Corporate Bonds

Lloyds Bank 4.65% BB+ S&P Undated 4,089,020

Diversified Credit Funds

M&G Alpha Opportunities Fund Not Rated N/A 1 month notice 10,000,000

M&G Total Return Credit Investment Fund Not Rated N/A 3 days notice 10,000,000

Treasury Bills

UK Treasury Not Rated N/A 20/04/2015 9,997,086

UK Treasury Not Rated N/A 29/06/2015 9,989,341

Fixed Deposits (Banks)

Lloyds Bank (LAMS Scheme) A1 Moody's 16/01/2018 1,000,000


London Borough of Newham Not Rated N/A 27/04/2015 5,000,000

City of Salford Not Rated N/A 16/07/2015 2,000,000

Middlesbrough Council Not Rated N/A 25/11/2015 3,000,000

Swindon Borough Council Not Rated N/A 07/11/2016 5,000,000

Lancashire County Council Aa2 Moody's 15/11/2016 5,000,000

Middlesbrough Council Not Rated N/A 25/11/2016 3,000,000

Deposit Accounts

Bank of Scotland (Lloyds Banking Group) A1 Moody's On Call 4,000,000

Svenska Handelsbanken Aa3 Moody's On Call 4,750,000

Santander UK plc A2 Moody's On Call 4,750,000

Cash Funds

Ignis Short Duration Cash Fund AAAf S&P 4 days notice 5,000,000

Insight Liquidity Plus Fund AAAf S&P 4 days notice 5,000,000

Royal London Cash Plus Fund AAA Fitch 3 days notice 5,000,000

Money Market Funds

Goldman Sachs Liquid Reserves AAAm S&P On Call 3,000,000

SSgA GBP Liquidity AAAm S&P On Call 500,000

Blackrock Sterling Liquidity AAAm S&P On Call 3,000,000

Morgan Stanley Sterling Liquidity AAAm S&P On Call 2,350,000

Aviva Sterling Liquidity AAAm S&P On Call 1,000,000

Deutsche Managed Sterling AAAm S&P On Call 2,000,000

BNP Paribas Insticash Sterling AAAm S&P On Call 1,800,000

Total 163,267,508

18 of 21

Appendix 3

19 of 21

Appendix 4

Valuation of Bond Holdings as at 31 March 2015

Name

Nominal

Holding

Purchase

Value (£)

Written

Down

Value (£)

Market

Value (£)

Notional

Gain/(Loss)

(£)

Corporate Bonds

Lloyds Bank 3,800,000 4,089,020 3,800,000 3,724,000 (76,000)

Local Authority Bonds

City of Leicester 908,000 976,100 920,638 1,080,266 159,628

City of Salford 908,000 976,100 920,638 1,019,557 98,919

Dudley MBC 908,000 976,100 920,689 1,108,032 187,343

LAB Investments 1,040,000 1,131,208 1,057,162 1,221,282 164,120

Gilts

UK Treasury 4.75% 2015 4,000,000 4,476,000 4,040,793 4,076,000 35,207

UK Treasury 4.00% 2016 6,000,000 6,485,700 6,114,623 6,311,400 196,777

UK Treasury 5.00% 2018 8,000,000 9,124,700 8,432,573 9,010,400 577,827

UK Treasury 4.50% 2019 5,750,000 5,986,498 5,842,464 6,552,700 710,236

UK Treasury 1.75% 2019 5,000,000 4,954,257 4,963,289 5,151,500 188,211

UK Treasury 4.75% 2020 10,000,000 10,730,000 10,349,679 11,760,000 1,410,321

UK Treasury 3.75% 2020 7,000,000 7,225,400 7,121,016 7,956,200 835,184

Total Bond Holdings 53,314,000 57,131,083 54,483,564 58,971,337 4,487,773

Valuation of External Fund Holdings as at 31 March 2015

Fund Name

Number of

Shares

Purchase

Value (£)

Market

Value (£)

Notional

Gain/(Loss)

(£)

M&G Alpha Opportunities 97,893 10,000,000 9,958,609 (41,391)

M&G Total Return Credit Investment 99,874 10,000,000 10,057,332 57,332

Total Fund Holdings 197,767 20,000,000 20,015,941 15,941

The market value shown on these bonds is based on the custodian's valuation.

However, this is only an indication and does not always reflect actual buying and

selling prices.

20 of 21

Appendix 5

Compliance with Strategy Limits as at 31 March 2015

2014/15

Holding Holding Strategy

31/03/15 31/03/15 Limits

£m %

Government Gilts 49.0 30.0% Max 95%

Treasury Bills 20.0 12.2% Max 95%

HM Treasury (DMADF) 0.0 0.0% Max 100%

Supranational Bonds 0.0 0.0% Max £40m

Local Authority Loans/Bonds 27.1 16.6% Max £40m

Registered Social Landlord Loans/Bonds 0.0 0.0% Max £50m

Money Market Funds 13.6 8.3% Max £25m

Collective Investment Funds: Fixed Income 0.0 0.0% Max £50m

Collective Investment Funds: Short Term Cash 15.0 9.2% Max £25m

Collective Investment Funds: Diversified Credit 20.0 12.2% Max £50m

External Fund Managers (segregated) 0.0 0.0% Max £50m

Bank/Building Society Fixed Loans 1.0 0.6% Max £50m

Bank Call/Deposit Accounts 13.5 8.3% Max £50m

Certificates of Deposit 0.0 0.0% Max £50m

Corporate Bonds (direct) 4.1 2.5% Max £5m

Total 163.3 100.0%

Compliance with Prudential Indicators for 2014/15

2014/15

Indicator Limit as at 31/03/15

External Debt Indicators

Authorised Borrowing Limit £50,000,000 £66,400

Operational Borrowing Boundary £25,000,000 £66,400

Treasury Management Indicators

Upper Limit on Fixed Rate Exposure 100% 62%

Upper Limit on Variable Rate Exposure 50% 38%

Sums Invested Beyond One Year (Nominal) £122,000,000 £70,314,000

Upper Limit on Long Term Investments Maturing (Nominal)

in one year £25,000,000 £10,800,000

in two years £25,000,000 £19,000,000

in three years £25,000,000 £9,000,000

in four years £25,000,000 £9,514,000

in five years £25,000,000 £15,000,000

in six years £15,000,000 £7,000,000

in seven years £15,000,000 £0

in eight years £15,000,000 £0

in nine years £15,000,000 £0

in ten years £15,000,000 £0

Note: External Debt consists of Parish Deposits but there has been no requirement for short-

term borrowing for cash flow purposes in 2014/15.

21 of 21

Appendix 6

BASINGSTOKE & DEANE BOROUGH COUNCIL

- INVESTMENT CRITERIA -

Limits for Investment Types Approved Approved

Strategy Strategy

Investment Type

Counterparty

Limit

Total Type

Limit Minimum Rating Currently Active Maximum Period

Long Term Investments

UK Gilts None 95% None Yes 10 Years

Local Authority Loans * £10m £40m None No 5 Years

Local Authority Bonds * None Yes 10 Years

Supranational Bonds £20m £40m AAA Yes 10 Years

Registered Social Landlord Loans/Bonds £10m £50m A- Yes 10 Years

Short Term Investments

UK Treasury Bills None 95% N/A Yes 364 Days

UK Debt Management Office (DMADF) None 100% N/A Yes 364 Days

Local Authority Loans * £10m £40m A- Yes 364 Days

Money Market Funds £5m £25m AAA Yes 364 Days

Collective Investment Funds - Fixed Income £25m £50m N/A No 364 Days

Collective Investment Funds - Short Term Cash £5m £25m AAA Yes 364 Days

Collective Investment Funds - Diversified Credit £25m £50m N/A Yes 364 Days

External Fund Managers (Segregated) £50m £50m N/A No 364 Days

Bank and Building Society Fixed Loans ** £10m £50m A- Yes See list

Bank Call/Deposit Accounts ** £10m £50m A- Yes See list

Certificates of Deposit £10m £50m A- Yes See list

** Includes a £20 million limit on each foreign country

Minimum Credit Ratings Fitch Moody's S&P

A- A3 A-

Approved Banks/Building Societies Country Fitch Moody's S&P Max Period

Australia and NZ Banking Group Australia AA- Aa2 AA- 6 months

Bank of Montreal Canada AA- Aa3 AA- 6 months

Bank of Nova Scotia Canada AA- Aa2 A+ 6 months

Bank of Scotland Plc (Lloyds Group) UK A A1 A 6 months

Barclays Bank Plc UK A A2 A 3 months

Canadian Imperial Bank of Commerce Canada AA- Aa3 A+ 6 months

Commonwealth Bank of Australia Australia AA- Aa2 AA- 6 months

HSBC Bank Plc UK AA- Aa3 AA- 6 months

Lloyds TSB Bank Plc (Lloyds Group) UK A A1 A 6 months

National Australia Bank Australia AA- Aa2 AA- 6 months

Nationwide Building Society UK A A2 A 6 months

Santander UK Plc UK A A2 A 3 months

Standard Chartered Bank UK AA- A1 A+ 6 months

Svenska Handelsbanken Sweden AA- Aa3 AA- 6 months

Toronto Dominion Bank Canada AA- Aa1 AA- 6 months

Approved Money Market and Cash Funds Fitch Moody's S&P

Aviva Sterling Liquidity Fund Aaa-mf AAAm

Blackrock Gov't Liquidity Aaa-mf AAAm

Blackrock Institutional Sterling Liquidity Aaa-mf AAAm

BNP Paribas Insticash Sterling Fund AAAm

Deutsche Managed Sterling Fund Aaa-mf AAAm

Fidelity Institutional Liquidity Aaa-mf AAAm

Goldman Sachs Liquid Reserves AAAmmf Aaa-mf AAAm

HSBC Sterling Liquidity Fund Aaa-mf AAAm

Ignis Short Duration Cash Fund AAAf/S1

Ignis Sterling Liquidity AAAmmf AAAm

Insight ILF Liquidity Plus Fund AAAf/S1

Invesco STIC Sterling Liquidity AAAmmf Aaa-mf AAAm

JP Morgan Sterling Liquidity AAAmmf Aaa-mf AAAm

Morgan Stanley Sterling Liquidity AAAmmf Aaa-mf AAAm

Royal London Cash Plus Fund AAA/V1

State Street GBP Liquidity Fund Aaa-mf AAAm

SWIP Sterling Investment Cash Fund AAA/V1 AAAf/S1+

Authorised by: K Jaquest Date (w.e.f.) 02/12/2014

* Includes a £20 million limit on long term lending to local authorities.

Report to: Cabinet 23 June 2015...At 31 March 2015 the council had cash investments of £163.3...

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