Meeting of the Finance Audit & Risk Sub-committee
Date: Wednesday 12 August 2020
Time: 9.00am
Venue: |
Council Chamber Hawke's Bay Regional Council 159 Dalton Street NAPIER |
Agenda
Item Title Page
Information or Performance Monitoring
13. Treasury Report to 30 June 2020 3
Finance Audit & Risk Sub-committee
Wednesday 12 August 2020
Subject: Treasury Report to 30 June 2020
Reason for Report
1. This item provides an update of compliance monitoring of treasury activity and reports the performance of Council’s diversified investment portfolios
Background
2. As a requirement of HBRC Treasury Policy, a quarterly update is provided to the Financial Audit & Risk Sub-Committee (FARS) on all treasury investments.
3. As at Q4, 30 June 2020, the Treasury Investments to be reported on consist of:
3.1. Economic Impacts generated during the quarter
3.2. Cash and Cash Equivalents
3.3. Disposals and Acquisitions
3.4. Externally Managed Investment Funds
3.4.1. Long-Term Investment Fund (LTIF)
3.4.2. Future Investment Fund (FIF)
4. Since 2018, HBRC has procured treasury advice and services from PwC. Their quarterly compliance report has been attached to this report.
5. Officers and FARS continue to develop the Treasury reporting function. Enhancements included within this report is the reporting on HBRC Cash and Cash Equivalents. Further enhancements will continue to be developed as part of the FARS work programme for 2020-21.
Discussion
Economic Impacts
6. The fourth and final quarter for FY2020 illustrates how market volatility can have such a significant impact on the value of HBRC Investments. The vigorous bounce out of the Covid-19 NZ lockdown is evident in the numbers provided throughout this report. It’s important to note that while market volatility can create uncertainly, the downs (and ups) will occur from time to time. The strategy of diversifying an asset base is by far the best way of safeguarding any investment; achieved through exposing the investment to the full spectrum of global market movements.
7. The New Zealand economy has benefited by being in position of being able to return to somewhat normal, but the outlook is a challenging one. Globally, Governments which could afford to support their economies have been using tools such as quantitative easing to boost liquidity and reduce interest rates. However, there is still the perception that the global economy will shrink by 4.9%, impacting the advanced economies the most.
8. A closed New Zealand border for the foreseeable future will mean a smaller economy here. Because of our size, New Zealand will always be quite reliant on imports and foreign markets. 10% of the New Zealand economy pre Covid-19 could be attributed to travel and tourism; 40% coming from international visitors. This reliance may reduce for a time and that could boost sectors, such as import-competing manufacturing. It’s worth keeping in mind that the economy will not return to how it was, it will find a new equilibrium and set new trends and pivot from here.
9. As we are right now, the ‘bounce back’ has effectively come from enhanced income supporting policies, lower interest rates, redirected travel savings and an involuntary saving bump from lockdown. This is not expected to last. Private consumption is expected to lessen in line with the expected rise in unemployment, and any fixed mortgages needing to be ‘rolled over’ for any benefit to discretionary income, and the Major Banks will hurt from the ‘missed’ new lending cycle. The ANZ central forecast sees GDP returning to pre-crisis levels in mid-2022.
Cash and Cash Equivalents
10. As at June 30, HBRC had one Term Deposit ($2.5m) returning 1.65% and held $3.6m in its Cheque Accounts.
11. HBRC monthly cash liquidity position.
Cash Position |
Jan 20 |
Feb 20 |
Mar 20 |
Apr 20 |
May 20 |
Jun 20 |
Millions (NZD) |
Actual |
Actual |
Actual |
Actual |
Actual |
Actual |
Mean |
6.8 |
7.2 |
5.2 |
6.5 |
3.3 |
4.1 |
High Point |
21.7 |
22.2 |
9.4 |
15.8 |
6.2 |
6.3 |
Low Point |
2.6 |
4.8 |
2.8 |
2.6 |
1.4 |
1.4 |
Available facility* |
5.0 |
5.0 |
5.0 |
5.0 |
5.0 |
5.0 |
* facility available to HBRC is the BKBM + 1.1% margin. As at June 30, this would cost 1.4% to call on. |
12. Returns from assets classes such as Cash and Cash Equivalents will be unfavorable, when compared to Pre Covid-19 levels as mainly due to lower economic growth and controlled inflation.
Debt Funding
13. Council acquired $6.3m of funds through the LGFA tender on 8 July 2020, with repayments due in 2024 and 2025.
Managed Funds
14. The Total capital invested as at 30 June 2020 was $156.6m, this represents a true return of $2.6m (1.68%) return on the original investment after adjusting for inflation & fees.
15. Both Long Term Investment Fund (LTIF) and Future Investment Fund (FIF) have improved positions since the last reported positions in May 2020 and Q3 (March 2020).
16. CPI Protected Capital Amounts and Fund Totals:
Fund |
Total Capital Contributed30/6/19 |
CPI Protected Capital 30/6/19 |
Total Capital Contributed |
CPI Protected Capital 30/6/20 |
Value 31 Dec 19 |
Value 31 March 20 |
Value 30 Jun 20 |
|
$ |
$ |
$ |
$ |
$ |
$ |
$ |
LTIF |
40,000,000 |
40,280,240 |
46,577,569 |
47,608,886 |
50,651,390 |
46,305,061 |
49,921,914 |
FIF (HBRC Held) |
- |
- |
60,563,802 |
61,046,786 |
44,703,199 |
58,452,264 |
61,104,952 |
Fund |
Total Capital Contributed30/6/19 |
CPI Protected Capital 30/6/19 |
Total Capital Contributed |
CPI Protected Capital 30/6/20 |
Value 31 Dec 19 |
Value 31 March 20 |
Value 30 Jun 20 |
|
$ |
$ |
$ |
$ |
$ |
$ |
$ |
FIF (HBRIC Held) |
- |
- |
45,019,493 |
45,378,514 |
60,013,349 |
41,711,847 |
45,588,822 |
Total |
40,000,000 |
40,280,240 |
152,160,864 |
154,034,186 |
155,367,938 |
146,469,172 |
156,615,688 |
Long Term Investment Fund (LTIF)
17. The LTIF has benefited form being invested over a longer period, when compared to the FIF, which was invested during Q2 of the FY20 Year.
18. The Fund is fully compliant to the SIPO’s stipulated strategic asset allocation.
19. Below is financial year returns:
|
Return |
|
|
% |
|
|
Return |
Jarden |
Mercer |
Total |
Jarden |
Mercer |
Total |
Gross of Fees |
860,114 |
703,263 |
1,563,377 |
3.7% |
3.0% |
3.4% |
Net of Fees |
719,659 |
698,622 |
1,418,281 |
3.1% |
3.0% |
3.1% |
CPI |
|
|
|
|
|
1.5% |
Real net return |
|
|
|
1.6% |
1.5% |
1.6% |
20. From inception the LTIF has returned a CPI Protected Return of 4.9% (4.5% Jarden / 5.2% Mercer).
Future Investment Fund (FIF)
21. Funds invested with Mercer are fully SIPO compliant. Jarden expects to be fully compliant by Q1 2021. This is in line with previous reports of Jarden’s approach of a staggered approach of investing.
22. On 30 June, HBRC instructed Jarden to transfer the NZD denominated assets from HBRIC to HBRC, totaling a $16.6m Transfer. Jarden’s approach to manage the SIPO requirements will be to review the FIF on a consolidated level. This transfer represents the Sale & Purchase Agreement between HBRC and HBRIC Ltd, as recommended and agreed on at the 24 June 2020 Regional Council Meeting.
23. Combined HBRC and HBRIC Returns:
FY20 |
Return |
% (Annualised) |
||||
Return |
Jarden |
Mercer |
Total |
Jarden |
Mercer |
Total |
Gross of Fees |
862,026 |
414,957 |
1,276,983 |
2.1% |
1.0% |
1.5% |
Net of Fees |
698,261 |
412,218 |
1,110,479 |
1.7% |
1.0% |
1.3% |
CPI |
|
|
|
|
|
0.8% |
Real net return |
|
|
|
0.9% |
0.2% |
0.5% |
24. From inception the FIF has returned a CPI Protected Return of 0.3% (0.5% Jarden / 0.0% Mercer).
Outlook
25. The lower the starting point for interest rates and the higher the starting point for equity valuations, the lower the return assumptions will be for all asset classes. The below benchmark returns have been provided by Jarden (29 May 2020) and may help facilitate in modeling future returns for each asset class:
Cash |
2.7% pa |
New Zealand debt securities |
3.6% pa |
Global debt securities (unhedged) |
2.5% pa |
Global debt securities (hedged) |
3.6% pa |
New Zealand equities |
6.3% pa |
New Zealand property |
7.0% pa |
Australian equities |
6.9% pa |
Global equities |
6.0% pa |
Alternatives |
5.9% pa |
Note: These predictions do not form recommendations.
26. With the current 50/50 Growth/Income spilt in stipulated strategic asset allocation, this expects a return of 4.9% (less than the Targeted 5%). To achieve 5%, the split would need to be 45/55 in favor of Growth.
27. Given the economic climate and the fiscal position of the organisation, Council could consider operating outside of the treasury policy and not look to protect the capital base of the manage funds by adjusting for inflation. This would allow for more funds to be available for withdrawal to finance the origination’s shortfall in investment income.
28. To enable this to happen for the FIF, Council would need to consult on the change as the Significance and Engagement Policy has listed the proceeds of the sale of Napier Port as inflation adjusted capital base.
29. This could be considered by Council for the LTIF as this fund is not listed in the Significance and Engagement policy.
30. Council would need to consider the longer-term impacts of having a reduced capital base versus the short-term impact of a reduction in the shortfall and officers would recommend an analysis of the impacts if Council would like to consider this as an option.
Next Steps
31. The Annual Treasury Reporting requirements will be delivered as part of Annual Report, due to timing of the year end process and the revaluations of the other investment assets. The report will be included as part of the report for the Finance, Audit and Risk Committee during the recommendation for the adoption of the Annual Report which will be scheduled in October following the finalisation of the Audit Plan.
Decision Making Process
32. Staff have assessed the requirements of the Local Government Act 2002 in relation to this item and have concluded that:
32.1. as this report is for information only, the decision-making provisions do not apply
32.2. any decision of the sub-committee (in relation to this item) is in accordance with the Terms of Reference and decision-making delegations adopted by Hawke’s Bay Regional Council 25 March 2020, specifically the Finance, Audit and Risk Sub-committee shall have responsibility and authority to:
32.2.1. Monitor the performance of Council’s investment portfolio.
That the Finance, Audit and Risk Sub-committee receives and notes the “Treasury Report to 30 June 2020”. |
Authored by:
Geoff Howes Treasury & Funding Accountant |
Bronda Smith Chief Financial Officer |
Approved by:
Jessica Ellerm Group Manager Corporate Services |
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⇩1 |
HBRC Treasury Reporting as at 30 June 2020 |
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