Treasury management quarterly report to 31 December 2001

Report: 09
Date: 21 February 2002
By: Treasurer

Summary

This report reviews treasury management performance for the three months period ended 31 December 2001.

A. Recommendations

Members are asked to note the contents and budgetary implications of the report.

B. Supporting information

Background information

1. On 20 July 2000 this Committee adopted a Treasury Management Policy Statement. This Statement requires that the Treasurer submits regular reports on treasury and debt management operations throughout the financial year. This report reviews operations for the three months period to 31 December 2001.

Investment operations

2. The value of the investment portfolio at the end of December 2001 was £121 million compared to £146 million at the end of September 2001. The decrease in the value of the portfolio is influenced by the timing of large receipts and payments. The average daily size of the portfolio during the quarter was £196 million, compared to £202 million for the first six months of the financial year.

3. This Committee was advised in November 2001 of a revised annual forecast for interest on investments of £9.1 million (from a budget of £12 million). This revision assumed a future reduction in base rate of 50 basis points to 4%, which actually came about on 8 November 2001. Rates have remained at 4% with commentators predicting stability at this level until later this year, when pressure on rates may be upward.

4. Accrued interest on investments in the three months period to 31 December 2001 was £2.130 million, giving a cumulative figure of £7.322 million for the year to 31 December 2001. This nine months figure is in line with the previously revised forecast of £9.1 million. Table 1 summarises the position.

Table 1 - interest receivable 2001-02 – actual and forecast

Structure of the portfolio

5. The structure of the portfolio has continued to reflect the investment instruments selected for investment purposes as defined by Treasury Management Strategy. Sector limits are in operation and have not been exceeded.

6. The portfolio spread and the rate of return by market sector for this quarter is shown at Table 2.

Table 2 – Average sector size and rate of return for 3 months to 31 December 2001

7. The UK Bank and Foreign Bank sectors continue to make up the largest sectors of the portfolio. Opportunities with Local Authorities have diminished with no investments undertaken during the quarter. Call money is now held at a competitive rate with the Bank of Scotland, often up to the institution limit of £20 million. The size of the Building Society sector has remained stable with no new conversions to plc status.

Performance measurement

8. Investment performance across the portfolio has been influenced by the reduction in base rate. The rate of return across all sectors reflects market conditions and the 75 basis point reductions in base rate announced by the Bank of England during the quarter.

9. Investment performance is compared to the London Interbank Bid Rate (LIBID). The mean investment term during the three months to 31 December 2001 was 19 days. The return achieved on this length of investment is best compared with the one month LIBID rate. During the quarter investment operations across all sectors achieved a return of 4.18% against the one month LIBID average of 4.06%.

10. Investment performance is also compared to the National Westminster Bank plc Treasury Reserve Rate. This is the rate of return achievable had we chosen to invest directly with our banker to the same value and term as investments actually placed. The period's investment operations return of 4.18% compares well to National Westminster Bank's Treasury Reserve rate of return of 3.72%.

11. This Committee was advised in November 2001 that The Institute of Public Finance (IPF) benchmarking club would be reporting on treasury management performance among club members. Initial feedback for performance during the six months to 30 September 2001 indicates an MPA return of 5.14% compared with an average return of 5.31%. The slightly lower return could be influenced by a number of factors including the average length of investment during a period of falling interest rates and the lending limits set for individual institutions to minimize risk. Further analysis of this performance is underway to be included in future reports.

Debt management operations

12. The balance of debt outstanding at 31 December 2001 is £130.97 million, with the repayment of one maturity loan of £5 million this quarter. No other long-term debt management operations have been undertaken.

Operational issues

13. Investment operations have been undertaken in line with the Strategy for 2001-02 approved by Committee on 20 February 2001.

14. In line with the Treasury Management Policy Statement an annual report on treasury and debt management activity for the financial year 2001/02 will be submitted.

C. Financial implications

This Committee was advised in November 2001 that investment income was likely to fall short of the budget by £3 million in 2001/02, and this would be taken into account in the overall budget monitoring. There are no additional financial implications to report.

D. Background papers

CIPFA Treasury Management Benchmarking Club Supplementary Report April – Sept. 2001

E. Contact details

Report author: Stephen Skirten, Treasury Manager, Exchequer Services.

For information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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