As both the absolute levels of interest rates and credit margins contract, it is increasingly difficult for investors to obtain returns in excess of 1% from conservative fixed interest assets. Many Amicus clients are increasingly looking at bank subordinated debt where margins are much higher, but sections, such as NSW and WA councils, are prevented from investing in these instruments because of legislative requirements.
One option open to NSW councils seeking additional yield is an investment with NSW Treasury Corp in their hour glass facilities of which there are four options, of which the Cash Fund and the Long Term Growth Fund are the most popular.
Based on figures for September (copied below), the Long Term Growth Fund (LTGF) has out-performed the Medium Term Growth Fund (MTGF) over all periods and for longer periods has yielded 6% to 7% (or around 8% since inception). In our opinion these performance figures are unlikely to be sustainable as the progressive fall in interest rates has helped boost growth assets over the last thirty years and this “tailwind” is unlikely to be repeated over the next thirty years. However even if steady returns of 4% to 5% can be achieved going forward the LTGF is likely to significantly out-perform fixed interest investments so long as the investment horizon is long enough. For example, the LTGF has had six negative years of performance since its inception in 1989 including the last financial year. However over any consecutive six year period it has never had a negative return based on Amicus’ analysis.
As an indication of future returns from cash and cash-like instruments, the performance of the TCorp Cash Fund is the best indicator with an annualised return of 0.64% over the first three months of the year down from 0.96% over the last calendar year, but still out-performing the bank bill index benchmark of 0.12% annualised for the first three months of this financial year and 0.58% over the last twelve months.
Amicus has performed significant analysis on the Long Term Growth Fund for a number of its clients and believes it is likely to continue to out-perform the Medium Term Growth Fund. Amicus believes the LTGF is a viable option for many NSW councils to consider in certain circumstances, but would not recommend an investment unless there were appropriate frameworks and processes in place to manage the risks. Given the overarching mandate of councils is to invest in-line with the Prudent Person Guidelines at all times, any investment where there is a material risk of a capital loss needs to be managed carefully regardless of the potential returns.