Throughout its history, Amicus has advised 67 clients under a retained mandate and has helped a further 57 clients on a project basis. Amicus clients have spanned all states and territories of Australia (with a couple of offshore ones as well). Clients have been drawn from a wide range of sectors from local government and professional funds managers to charities, religious organisations, corporates, professional services firms (lawyers, accountants, consultants liquidators and administrators), financial planners and individual wholesale investors.

Amicus is currently in the process of changing its business focus and downsizing its operation. Amicus exited its retained client financial advisory business as of 30 June 2023. Melissa has joined Imperium Markets where she will continue in a client advisory role, helping investors with the management of their conservative fixed interest investment portfolios.

Moray will continue with all the remaining operations of Amicus and so will still be available to support clients already contracted regarding the LBA bankruptcy until its conclusion and on other mixed financial and legal issues going forward should any arise. Moray intends to continue operating the other Amicus businesses for the foreseeable future working more on a project basis in the area of expert witness work and consulting.

Amicus wishes to thank all its clients, both former and current, for the support they have given it over the last fifteen years and the enjoyment and job satisfaction they have provided to Moray, Melissa (and formerly Jason) in being able to provide quality financial advice that has hopefully helped investors towards better financial decisions and improved portfolio outcomes and investment returns.

Please feel free to contact Moray if you have any questions or simply want to chat .

Cumulatively, claimants who made claims early in the process and therefore were able to recover their full amounts from the insurance scheme have now recovered over 78% of their admitted claim amount (approximately 75% recoveries for those who claimed later and were unable to access the insurance scheme).  For most claimants, this amount covers all principal so the resultant loss from these investments is likely a loss of interest only.  Recoveries will also vary depending on the costs of making a claim.  For those funded through the legal action by IMF (now Onmi Bridgeway) over half the recovered amounts may have gone in legal and funding fees (the funding fee alone amounts to around 40% of the latest dividend payment for many clients).

Those who elected not to go with a litigation funder, including the thirty seven claimants who engaged Amicus, made much higher returns.  However, if the original claimants, Parkes, Wingecarribee and Swan Councils had not engaged a funder, there would likely have been no claim and no claimant would have made any recovery at all.

The dividend paid in December is not the final dividend payable as the bankruptcy procedure is not officially concluded.  Our understanding is two issues remain.  The first is a refund of with-holding tax paid from His Majesty’s Revenue and Customs (HMRC) (the UK’s equivalent of the ATO) which is still owed to LBA.  It is unknown when this will occur, but our understanding is payment is largely procedural and the amount of the rebate while substantive in absolute terms will not result in a large dividend payment.

The second issue is a potential lawsuit against Fitch Ratings agency where LBA believes it has a supportable claim after it was discovered that Fitch’s credit ratings on CDOs produced by its model were increased several notches using a hidden table with apparently no analytical basis.  If the claim is progressed and is ultimately successful, then monies will likely flow to the estate and result in further dividend payments to creditors. 

We would encourage clients to treat this final dividend when it occurs as a “windfall” and for all intents and purposes to regard the current dividend as the final “material” payment from the LBA estate.  We make this suggestion largely due to the uncertainties regarding the Fitch claim in terms of its chances of success, the timing of any potential payments made and the quantities of those payments.  In the scenario of a long court case, any final payment could be up to five years in the future.

Ironically, given there is still monies left in the estate, for any investor who lost monies on structured products distributed by Lehman Brothers Australia (or its forerunner Grange Securities), there is still time to claim.  Under insolvency law, any claimant who is admitted now has priority payment status for any back dividends paid to other claimants before any additional dividends are declared.  Hence, a new claimant will recover over 75% of its claim amount should its claim be admitted (which Amicus is highly confident it will be if it is able to mount a similar case to all previously admitted claimants).  Please feel free to call Amicus on a no obligation basis if you have not claimed and think you may have a claim.

In a previous Amicus article, we delved into the details of these two options, discussing the “Three C’s” that investors should consider when making a decision – Compliance (Risks and Security), Convenience, and Costs.  Exploring this topic further we provide an update to our thinking under these three headings below:

Compliance

Our conclusions previously was there was no real difference with the risks in both choices; the main risk being a rogue employee of either the Safe Custody or Proxy provider illegally and fraudulently trading in the client’s Austraclear account (or sub-account) without the client’s permission.  Our view was that if the service was provided by a Major Bank, this was more secure than if it were provided by a smaller organisation with less assets (such as FIIG, Laminar, Curve, ETOS), but only on the basis a larger bank would have the financial capacity to compensate a client for any loss, whereas a smaller organisation might be limited by the size of its professional indemnity insurance. 

Claims that somehow if clients did not have an Austraclear account established in their own name they were not the legal owner of the securities we regard as “hogwash” with every Major Bank and broker willing to make the representation that the clients for whom they hold the securities are the legal and beneficial owners of those securities rather than the bank. Further this has been tested in the past with the default of Lehman Brothers Australia who held its clients’ bonds under this method. In general there was minimal disruption and no disputes as to the ownership of the assets.

One issue we did not explore in our previous article (which could be a Compliance issue for some organisations) is that every Austraclear Proxy or Safe Custody provider (except ETOS) is also a dealer in securities.  This provides a side benefit to the banks and brokers providing the service which is one of the reasons they provide Safe Custody cheaply or at cost, and one of the reasons why Laminar as an active broker provides an Austraclear proxy service at all. 

The operator of the Safe Custody or Austraclear Proxy account gains significant market intelligence having visibility as to which of its clients hold which bonds and at what prices those securities are traded in the secondary market which is effectively what is disclosed through a Safe Custody or Proxy service.  Many will also use this to suggest or initiate trades for the holder that are beneficial to the bank or broker.

Convenience

Amicus concluded in terms of Convenience, Austraclear Proxy enjoyed a small advantage which grew for holders of multiple securities not having to hold their securities with different banks or brokers, but rather having them held in one place being Austraclear. 

Another Convenience aspect that has become more significant is when the Major Banks issue domestically, they typically do “self-led” deals as sole managers.  Therefore, if it is CBA or NAB, these banks will provide Safe Custody for free, ANZ will charge 7bps and Westpac does not offer the service.  This is not an issue for those that use Austraclear Proxy, but makes purchasing Westpac and ANZ deals at new issue more cumbersome or costly for those relying on Safe Custody.

In recent market developments, Curve Securities is offering a paid service for 5bps taking all bonds regardless of whether they have been purchased through Curve. This allows investors to hold all their bonds with one provider negating any convenience arguments although most investors seem to be holding their bonds with CBA where they can enjoy free safe custody service and any other bonds not sold to them by CBA with Curve.

Costs

Regarding Costs, most of the expenses of Austraclear Proxy are fixed (and run into thousands of dollars).  For investors with larger holdings, the lowest cost solution typically depends on the Safe Custody fees charged (if any).  Whereas the costs (if any) of Safe Custody are variable so smaller holders are nearly always better off with Safe Custody. 

As mentioned previously, Curve Securities has become more active in the market offering Safe Custody services for a fee of 5bps.  Barrenjoey, a relatively new market entrant, is looking at its options in this area to facilitate more client flow.  NAB’s service is currently suspended awaiting outcomes of discussions with their custodian.

The cost consideration largely comes down to size of holdings.  For those with a $20 million portfolio, paying Safe Custody fees of 5bps that is a cost of $10,000 annually which will likely cover the first year costs of maintaining an Austraclear account.

If you would like to discuss the key considerations for choosing between Safe Custody and Austraclear Proxy, please don’t hesitate to contact Amicus.  Our Amicus service for retained clients includes guidance on any developments and updates related to this area which remains dynamic with a lot of ongoing changes.

“Benchmark” bonds issued by Northern Territory Treasury Corporation (NTTC) are actively traded and compete with other liquid bonds issued by the six states in Australia (semi-government bonds).  NTTC is rated Aa3 by Moody’s because it is explicitly guaranteed by the Northern Territory government which has taxing powers and a level of implicit support from the Federal Government. 

As interest rates were very low in mid-2020, NTTC bonds appeared very attractive as they were paying relatively high rates of interest above 1% for all terms when rebates were factored in.  However as with all fixed rate investments, the bonds carried risk the underlying interest rate environment would change (i.e. interest rates would rise and investors would be left holding bonds paying below market coupons).

We analyse below how those investors who purchased NTTC bonds back in 2020 have fared over the period of their investment.  In September 2020, annual interest rates offered on the NTTC bonds were:

The rates quoted are annual rates to the maturities shown.  In addition to interest on the bonds, NTTC paid a 0.25% agency fee to organisations with an AFSL who placed the bonds with their clients.  Amicus was able to capture this fee and rebate it to all its clients, thus effectively boosting the yields on their investments.  This enhanced the annual yield on the then 15 month December 2021 bond by 20bps (equal to 25bps / 1.25 years), by 11bps (equal to 25bps / 2.25 years) for the December 2022 bond and so forth for the remaining bonds as per the table above.

On a simple interest basis, a client investing in a 15 month NTTC bond to December 2021 would have earned 1.00% interest (0.80% * 1.25 years) plus, if the investment had been placed via Amicus, a rebate of 0.25% of the placement fee for a total return of 1.25% as compared with a cumulative return of 0.32% by investing in rolling 3 month TD’s over the period (comprised of 11bps (0.42% / 4) from the September 2022 TD maturing in December 2020, 5bps from the December 2020 maturing in March 2021 etc as per the table).  Clearly, the investment in the NTTC bond was a superior choice looking purely at returns.

Similarly, an investment in the 27 month NTTC bond investment to December 2022 was also more favourable with the coupon of 0.90% exceeding coupons paid on 3 month TD’s for all periods except those offered in June and September 2022.  Over the total period, clients would have received 2.03% interest or 2.28% when the rebate is added as compared with 1.56% by investing in TD’s.

Unfortunately with interest rates now much higher it appears as if investing in rolling 3 month TD’s will garner more interest relative to the NTTC bonds for maturities out to December 2023, 2024 and 2025 as per the table.  This is due to the rapid rise in interest rates since the RBA started raising the cash rate in May 2022.

The lessons learned from this analysis are:

There is Always Risk:  Counterintuitively, the most risk is present in situations where the least risk seems to exist.  In September 2020, the yield curve was predicting an average interest rate to December 2025 of just over 0.29% (the swap rate to September 2025).  This turned out to be wildly inaccurate with investors who rolled TD’s now likely to gain an annual return of just over 3.00% for the period (a factor of ten difference).  Even looking at 7 and 10 year rates in 2020, there was no indication of such dramatic rate rises to come.  Further, economists were predicting, and the RBA was stating, there would no interest rate rises until 2024.  Had this guidance proved correct, then investments in the NTTC bonds would undoubtedly have yielded greater returns over all the periods, with the only realistic chance of under-performance being in the period until December 2025.

In short, in the space of two and a half years since the investments were made the interest rate outlook has changed dramatically because of unforeseen and unpredictable events (policy responses to the lockdowns to slow the spread of COVID and Russia invading Ukraine which led to rise in energy prices and supply disruptions, etc).  Everyone underestimated these risks so prudent investors should always avoid discounting too heavily scenarios they don’t believe are likely to occur (”black swan” events).  

The Longer the Term the Higher the Risk:  Predicting economic outcomes in the short-term is always much easier than predicting over a longer period.  The better performance of the NTTC bonds over the shorter period is testament to this fact.  It was far easier to predict interest rates were unlikely to rise in the short term as economies were in deep recession with the pandemic and it was all hands to the wheel to keep households and businesses afloat.  Obviously, how the pandemic would play out in the medium term after the crisis, and the aftereffects of the government stimulus were much more difficult to forecast.

Performance may be more Valuable in one Period than Another:  Feedback we received from many clients at the time was there was great utility in meeting their budgets.  In general, these had been set when interest rates were higher and so many clients were under-performing.  The immediate boost given by the greater running yield on the NTTC bonds and the certainty of the cashflows was of potentially of more benefit at the time than the risk of under-performance later. 

These same clients are no longer under the same budgetary pressures as interest rates have risen dramatically providing them with ample investment opportunities; for them meeting current budget is not a difficult task.  Hence, while over the period the NTTC bonds may have yielded less interest, the benefits of smoother cashflows and meeting or exceeding budgets each year has been a benefit that has out-weighed the likely cumulative lower returns.

Benefits of Diversification:  Although Amicus had few fears on the credit-worthiness of the issuer NTTC, Amicus was always cautious of the interest rate risks taking a prudent view that simply because neither we nor the market, nor any leading economists could see little risk did not mean there was little risk.  Diversification is the last “free lunch” in finance, and it costs investors nothing (or very little) to diversify their portfolios, but inevitably reduces volatility and provides risk protection (particularly against unforeseen and unpredictable events whose probability is perennial under-estimated as is human nature – “Black Swan” events again).

In summary, constructing a well-diversified portfolio will remain crucial for investors regardless of what happens to interest rates in the upcoming year.

In addition to the apparent value, there are also some additional compelling reasons to purchase when these offers become available being:

Buying an FRN largely locks in performance over the benchmark bank bill index by the margin above BBSW at which the FRN is purchased.  This is obviously premised on the Major Bank not defaulting and the FRN not being sold prior to maturity; both of which are reasonably safe assumptions for most buy and hold investors.  This is potentially important for investors who measure their performance against the bank bill index given the index is rising rapidly as per our recently published article.

FRNs carry minimal interest rate risk with the coupon adjusting to prevailing market rates as interest rates rise and fall.  This may be particularly appealing at this point in the interest rate cycle where interest rates are almost certainly going to rise in the short term, but after that there is a great deal of uncertainty as to how high they may rise or even if they will subsequently need to be reduced if inflation is brought under-control but in doing so a recession is induced.

FRNs are tradeable and are therefore are a source of liquidity.  In a practical sense the “liquidity value” of any security is enhanced if it can be sold without loss (or even for a small profit).  The chance of this occurring is increased if it has a high coupon margin as there is greater scope for the market trading margin to fall below the coupon margin through time (meaning the trading price rises above par).  This is in addition to the normal “roll down” effect where the trading margin reduces through time due to the shortening maturity of the security.

For most investors who mark to market, 12 month rolling performance relative to the Bank Bill index is quite possibly already negative.  However, since few investors mark their term deposit investments to market and only some investors mark their hold to maturity securities to market, then for most investors, performance relative to the index is still currently positive although it is starting to fall.

As a result, it is highly likely that 12 month rolling investment performance relative to the index for some investors will become negative, either late in 2022 or early in 2023, simply because their investment portfolios cannot increase their average yield by 20bps per month which is what they will need to do keep up with the index until next April (when the 12 month rolling return on the index will be above 2.00% if current interest rates are unchanged).

The graph above shows the monthly returns on the Bloomberg Bank Bill index since January 2022 and a forecast of the monthly returns from September 2022 to April 2023 based on the current interest rate curve being maintained. This is conservative and likely underestimates the possible increases given most economists are predicting interest rates to rise further. 

If these forecasts are realised, the 12 month rolling interest return will continue to rise to above 2.03% as per the graph below before the pace of increase slows as positive returns on the index from May 2022 onwards begin to partially offset the ongoing circa 20bps per month rises.

The more positive aspect is with rising interest rates, absolute yields on most investor portfolios have been rising in recent months.  Amicus has been working with its clients to both re-set budgets for the Financial Year July 2022 to June 2023 in light of forecast higher returns, but also to work with clients on investment strategies to ensure their investment portfolio returns remain above the Bank Bill index on a 12 month rolling basis (an objective we feel is important to demonstrate the “wise and judicious” as well as the “conservative” component of the prudent person rule).

The RBA publishes its forecast rates of inflation for the upcoming five half years in its quarterly Statement of Monetary Policy (SoMP).  Copied in the table below are the RBA’s predictions for Australian inflation going back to August 2019.  Figures highlighted in dark blue are the actual annual inflation rates at the prior half year.

The RBA is somewhat “politically constrained” in its forecasts.  To explain, from a perception perspective the RBA could not have forecast an inflation rate of 6.10% by June 2022 when it made its prediction 7 months ago in February 2022. This is because it would have been compelled to raise interest rates far earlier and far more aggressively to prevent inflation rising so rapidly (it actually predicted a rate of 2.00% as per the table).  However, if it had accurately forecast a 6.10% inflation rate and raised interest rates earlier, this would likely have prevented inflation reaching 6.10% and so its forecast would have been wrong.  To summarise, the RBA will nearly always predict inflation within the target band, or if it is not within the target band, the RBA’s prediction will be to have inflation moving from its current level closer to the target band because if this were not the case, the RBA would be expected to adjust policy settings to make it the case.

This logic above is empirically demonstrated in the table as the RBA always predicts in its furthest quarter inflation will move closer towards the target band than it was at the time of prediction and in most cases be within the policy band.  In contrast, the actual results show inflation has never been within the 2% to 3% target band at any half year end in the last three years (either being persistently below until December 2021 when it rose rapidly and has continued to rise since).

It can be argued the last few years have been difficult for economic forecasting and the purpose of the article is neither to argue no-one could have predicted the inflation data over this period (given a global pandemic, various central bank responses to the pandemic and Russia’s invasion of Ukraine), nor to say the RBA is incompetent and its forecasts should be better.  The purpose is rather to argue whatever the forecasts are currently they are quite likely to be wrong and wrong by significant margins as per the histogram of the RBA errors distribution below.

The RBA’s most recent prediction if for an inflation rate of 6.10% by June 2023 (10 months into the future from the date of the forecast) but its average error on 10-month predictions is above 2% so the actual inflation figure is just as likely to be either 4% or 8% and could well be either 3% or 10% as per the histogram data.

Clearly, if inflation has fallen rapidly from current levels to 3%, it is almost certain the then most recent (June 2023) quarter will show a negative inflation rate fore the annual rate to have fallen that far that fast.  In this scenario, the RBA will most likely have already cut or be cutting interest rates close to 0% to stave off or ameliorate a recession.  Conversely, if inflation is at 10% then inflation will be continuing to accelerate from current levels and the RBA will most likely have raised rates well above the current predictions of a terminal cash rate of between 3.00% and 4.00%.  In the milder scenarios of 4% or 8% inflation, then the cash rate will very likely either be 1% to 2% lower or higher than currently predicted; the current cash rate prediction being appropriately matched to the RBA’s expectation of a 6.1% inflation rate by June 2023.

The lesson to be learnt is the current cash rate and the expected future cash rates are premised on the RBA’s forecasts of inflation being realised.  Based on historical data, this is unlikely to occur given the RBA’s extremely poor record in forecasting.  However, we are unsure whether inflation with either over-shoot or under-shoot and interest rates will be lowered or raised from current expectations. 

This risk in predictions also explains why there is a premium offered for fixed rate investments as there is more risk in taking on fixed rate investments as opposed to floating as with floating rate investments you effectively lock in the margin over the 3 month BBSW rate if you hold to maturity (and the issuer does not default), but with fixed rate investments you are taking a risk (that can either work for or against you) on whether the RBA is over-predicting or under-predicting inflation and this risk is potentially more than is immediately apparent.

According to KPMG’s Major Australian Banks Full Year Analysis 2021 Report published in November, the Majors posted a combined cash profit after tax from continuing operations of $26.8 billion in the latest financial year. This was +54.7% on the previous financial year, though down 2.3% on FY19.  The Majors’ net interest margin (NIM) declined 3bps over the year driven by low interest rates and high competition.  This is also despite cheap funding from the RBA’s Term Funding Facility which closed to drawdowns on 30 June 2021.

The Majors’ latest profit results was boosted by the release of collective provisions of $1.7 billion compared with impairment charges amounting to $6.9 billion in 2020 in response to the COVID-19 pandemic.  The release in impairment provisions this year reflects improving economic conditions in Australia and lower than expected losses through the pandemic.  However, total impairment provisions of $21.5 billion still remain high compared with pre-COVID levels which will continue to serve as a buffer against potential future risks.

The Majors’ cost-to-income ratio decreased from an average of 53.3% in FY20 to 52.1%.  Operating costs (excluding notable items) increased by 3.6% to $38.2 billion due to regulatory compliance requirements and ongoing customer remediation.

The Majors also continued to strengthen their capital levels, with the average Common Equity Tier 1 (CET1) ratio rising 131 bps to an “unquestionably strong” 12.7%.  The Majors further improved capital buffers while dividend payout ratios increased from 52.3% in FY20 to 70.0% in FY21 driven by banks’ robust financial results and confidence in Australia’s economic recovery. 

Macro-Prudential Framework

At the end of November, the banking regulator Australian Prudential Regulation Authority (APRA) finalised its new bank capital requirements framework.  APRA said its new framework, which is effective from January 2023, would not force banks to raise more capital and it would just tweak the risk asset weightings.  Simplistically, the risk weightings on the riskiest mortgages (interest-only and investor loans) will be increased, while risk weightings on certain types of small business loans will fall modestly.

This new capital framework had been repeatedly flagged by APRA in the market, and banks have therefore already moved to adjust their interest rates, particularly for interest-only, investor loans, and borrowers with high loan to value ratios.  APRA hopes the new capital requirements framework will also incentivise banks to lend prudently, by requiring more capital to be held for riskier loans with a higher probability of loss. This also follows APRA’s new rules announced in October which requires lenders to increase the serviceability buffer for mortgages to an interest rate rise of 3.00% from the previous 2.50% as part of macro-prudential regulation to limit the increase in mortgage borrowing. 

Overall the recent financial performance of the Majors combined with APRA’s revised rules and new capital framework is seen by Amicus as a positive for each bank’s longer-term credit risk and asset quality profile.  However underlying pressures remain including low interest rates (meaning suppressed NIMs), strong mortgage competition, emergence of neo-banks and other financiers with improved technology and business models and potential disruption of economic activity due to new COVID variants.

APRA announced that before a new banking entrant can have a two-year restricted ADI (RADI) licence, the new bank needs to present a business plan and is required to have contingency and exit plans should its banking business fail.  The new entrant ADI will also have to have tested both an income-generating asset (such as loans) and a deposit product before these products are approved by APRA to be offered to the wider public.

The banking regulator has also clarified capital requirements for neobanks at different stages of the restricted licensing process to facilitate an easier transition to a full licence and reduce capital volatility.  Restricted banks will have a $2 million deposit limit and are required to meet ongoing capital requirements (the higher of $3 million plus $1 million in a resolution reserve, or 20% of adjusted assets) with an additional three months’ operational expenses.

The RADI will be formally assessed by APRA during the restricted phase and the regulator will assess if the RADI holder is ready for a full licence.  If a new entrant bank already has a history of running a successful banking-related business, it can directly apply for a full banking license, which allows the bank to accept funds from the general public. 

The new banking licensing changes were initiated as a response to the collapse of neobank Xinja in 2020.  Xinja received its full unrestricted banking license from APRA in 2019. The primary cause of the neobank’s failure was it was offering deposit products to its customers before it had any income-generating sources such as loans (meaning it had to pay interest to customers before it was receiving any interest itself).  Due to delays in launching its income-generating products, Xinja was working to secure a capital investment which failed to materialise leading to Xinja’s demise soon after the first anniversary of receiving its license.  While no depositors lost money as APRA acted swiftly, shareholders were almost entirely wiped out meaning it was a close call for the government being exposed through its deposit guarantee scheme for the first $250,000 for every protected account holder with all other depositors who invested monies in excess of this amount being exposed to the balance of their deposit.

APRA stated the revised approach to banking licensing will “encourage more sustainable competition in the banking sector by ensuring new ADIs are better equipped to succeed”.  Currently, there are two RADIs in Australia being “in1bank” and “Alex Bank”.  Neobanks in the Australian market include Up, Volt, Revolut, Judo, Hay, Douugh, Tyro and 86 400 (purchased by NAB in May 2021).

As investors continue to search for yield amid a low interest rate environment, Amicus continues to advise conservative investors against depositing funds in these neobanks as several do not have a proven business model and established management and none has an extensive track record, credit rating or is publicly listed.  The few extra basis points offered on these neobanks’ term deposit interest rates are not sufficient for the additional risks in our opinion as demonstrated by the near miss for depositors funding Xinja.

Longer term liabilities can best be managed better by hedging them with growth assets as over the longer term growth assets are expected to provide better returns than lower risk cash assets; although short-term volatility is almost certainly going to be greater.  For example, simple maths shows over a thirty year time horizon over four times as much money needs to be set aside to defease a future liability if it is assumed a 1% return is made on invested funds as opposed to a 6% return.

Under prevailing investment legislation, the only access NSW councils have to growth orientated assets within their investment portfolios is via the NSW Treasury Corp (TCorp) IM Funds investment facilities.  Within these selection of funds, the most growth orientated one is the Long Term Growth Fund (LTGF) as it contains the largest proportion of capital growth assets (the Medium Term Growth Fund also contains growth assets but at a lower percentage and therefore is less efficient as a source of growth assets). 

Amicus has worked with and advised several NSW councils to utilise the LTGF to defease some of their long-term liabilities.  Typically, a hedging strategy involves the complex task of matching the current value of the long-term liability with the growth assets, then adjusting the hedge within defined parameters each year depending on the movement in value of both asset and liability.

The largest danger is volatility in returns over the defeasance period, therefore robust processes and procedures must be put in place to manage these risks and to ensure management and councillors understand the issues and are committed to the strategy on a long-term basis. Research and analysis undertaken by Amicus on the LTGF has been documented to provide a compelling case as to why investing in growth assets is a demonstration of councils acting “prudently” rather than engaging in “speculation” in search of higher returns.

Please contact Amicus if these hedging strategies may be of interest to you as we can provide guidance and advise on implementing procedures and protocols that have worked for other NSW councils.