Investment Strategy – Review Initial briefing and recommendations James Parker 12 th May 2014 Note: I have NO training as a financial advisor © Bishop’s Stortford Town Council

Investment Challenge Cash balances follow a sawtooth between 1.5M & 1M made: Cash balances follow a sawtooth between 1.5M & 1M made: General reserves :~600k (region a) General reserves :~600k (region a) Earmarked reserves: ~400k (region a) Earmarked reserves: ~400k (region a) Working funds: 0-500k (regions B & C) Working funds: 0-500k (regions B & C) Little/no scope to increase returns in regions b & c Little/no scope to increase returns in regions b & c Region c is managed through COIF – return approx 0.35% Region c is managed through COIF – return approx 0.35% Region b is managed through a notice account (currently Lloyds 95 day) – return approx 0.7% Region b is managed through a notice account (currently Lloyds 95 day) – return approx 0.7% Returns from region A (reserves) might be increased if we accept increased risk Returns from region A (reserves) might be increased if we accept increased risk Currently invested in a restricted range of term accounts in accordance with risk-averse policy Currently invested in a restricted range of term accounts in accordance with risk-averse policy Return 0.85%-1.5%*, new investments currently return 1.5%, average 1.2% Return 0.85%-1.5%*, new investments currently return 1.5%, average 1.2% CPI currently 1.6% -> annual real terms cost of retaining capital = £6750 CPI currently 1.6% -> annual real terms cost of retaining capital = £6750 This is significantly better than in Q1/2010 when the current policy was first created, principally because CPI has fallen This is significantly better than in Q1/2010 when the current policy was first created, principally because CPI has fallen * depending on rates on offer at date of investment © Bishop’s Stortford Town Council

Investment Policy Current Policy (Adopted September 2012) Current Policy (Adopted September 2012) “The Council adopts a risk-averse approach to investment. Investments may be made in: “The Council adopts a risk-averse approach to investment. Investments may be made in: Cash deposits (including term deposits) with major banks headquartered in the UK Cash deposits (including term deposits) with major banks headquartered in the UK Cash deposits (including term deposits) with UK Mutual Societies Cash deposits (including term deposits) with UK Mutual Societies Government Bonds (Gilts) Government Bonds (Gilts) Public Sector Deposit Fund managed by COIF “ Public Sector Deposit Fund managed by COIF “ “The Council will not normally invest in “The Council will not normally invest in Equities Equities Corporate bonds Corporate bonds Banks not headquartered in the UK or UK subsidiaries of banks not headquartered in the UK Banks not headquartered in the UK or UK subsidiaries of banks not headquartered in the UK Other financial instruments” Other financial instruments” “The Council will not invest with banks which are not headquartered in the UK even though they may have a major operation in the UK. Specifically this excludes Santander. This decision is based on the Council’s assessment of the likelihood of a UK government backed rescue should a bank get into financial difficulty.” “The Council will not invest with banks which are not headquartered in the UK even though they may have a major operation in the UK. Specifically this excludes Santander. This decision is based on the Council’s assessment of the likelihood of a UK government backed rescue should a bank get into financial difficulty.” Possible extensions Possible extensions Cash deposits with higher risk financial institutions Cash deposits with higher risk financial institutions Equities (Shares) or derivatives Equities (Shares) or derivatives Corporate bonds or derivatives Corporate bonds or derivatives Property Property Additional option to consider Additional option to consider Pay down pension debt Pay down pension debt Ruled out: Pay down our property loans Ruled out: Pay down our property loans Penalties result in negative return Penalties result in negative return DCLG recommendation is: Security – Liquidity – Yield in that order DCLG recommendation is: Security – Liquidity – Yield in that order © Bishop’s Stortford Town Council

Option 1: Higher risk financial institutions Risk: Institutional Insolvency Risk: Institutional Insolvency Current Best within policy Current Best within policy Saffron Walden BS 1.5% 1 year bond Saffron Walden BS 1.5% 1 year bond Example rates with out-of policy organisations Example rates with out-of policy organisations Bank of Cyprus: 1.60% - 1 year, 1.90% - 2 years, 2.15% - 3 years Bank of Cyprus: 1.60% - 1 year, 1.90% - 2 years, 2.15% - 3 years United Trust Bank: 1.60% - 1 year, 2.05% - 2 years, 2.25% 3 years, 2.75% - 5 years. United Trust Bank: 1.60% - 1 year, 2.05% - 2 years, 2.25% 3 years, 2.75% - 5 years. Co-op bank: 1.50% - 1 year. Co-op bank: 1.50% - 1 year. These are what is currently available These are what is currently available Restricted choice when existing funds mature can force us to choose lower rate funds Restricted choice when existing funds mature can force us to choose lower rate funds Note that Town & Parish Councils do not benefit from the FSCS compensation scheme Note that Town & Parish Councils do not benefit from the FSCS compensation scheme © Bishop’s Stortford Town Council

Option 2 – Shares (Equities) Risk: Shares may go up or down Risk: Shares may go up or down Control of exit date surrendered and/or risk of capital loss Control of exit date surrendered and/or risk of capital loss Management options Management options Professionally managed individual holdings Professionally managed individual holdings Index Tracker or other ‘fund’ Index Tracker or other ‘fund’ Self-managed (not competant) Self-managed (not competant) 75% of managed funds underperform index! 75% of managed funds underperform index! Source – Vanguard UK, however this figure is quite frequently quoted Source – Vanguard UK, however this figure is quite frequently quoted © Bishop’s Stortford Town Council

Shares – What’s the risk? © Bishop’s Stortford Town Council FTSE All Share – gross annual capital gain over fixed period (1 & 2 Years) FTSE All Share – gross annual capital gain over fixed period (5 & 10 Years) The Marketing Story: Manipulated by choice of start date to show positive return at all times Closer to the truth? Over 2 years – ~37% risk of making a loss/negligible gain Over 10 years, ~20% risk of making a loss/negligible gain Note; figures exclude both dividend income and fees/charges => broadly comparable to low charge tracker fund On average shares returned inflation+6% during Conclusion with an equity investment: (1)plan for 5-10 years + (2) accept loss of control of exit date +/- 5 years (you might have to wait through very nervous times)

Options 3 & 4: Corporate Bonds & Property Corporate Bonds: Commercial fixed term IOUs Corporate Bonds: Commercial fixed term IOUs Pay interest (for historical reasons called ‘the coupon (rate)’) Pay interest (for historical reasons called ‘the coupon (rate)’) Purchase Purchase on secondary market at current trading value - higher or lower than face value on secondary market at current trading value - higher or lower than face value In a basket with other bonds (managed fund) In a basket with other bonds (managed fund) Redemption Redemption On expiry of term (1-20years) at face value On expiry of term (1-20years) at face value at any other time on secondary market at current trading value at any other time on secondary market at current trading value Forced redemtpion (“call”) Forced redemtpion (“call”) Sometimes the issuer can insist they buy back earlier Sometimes the issuer can insist they buy back earlier Risks Risks Insolvency of issuer Insolvency of issuer Capital loss if sale price less than purchase price Capital loss if sale price less than purchase price Reward Reward On average bonds returned inflation + 1.4% , but this hides very significant variations On average bonds returned inflation + 1.4% , but this hides very significant variations Further study needed Further study needed Property – Residential (buy to let) or Commercial Property – Residential (buy to let) or Commercial Not yet investigated, long term investment returning income Not yet investigated, long term investment returning income © Bishop’s Stortford Town Council

Summary/Conclusion Current risk-averse policy costs about £6750 annually in real terms Current risk-averse policy costs about £6750 annually in real terms When policy created the annual real terms cost was £32,000, so the situation has improved materially When policy created the annual real terms cost was £32,000, so the situation has improved materially Best rate for newly invested money is 1.5% currently, CPI is currently 1.6% annually Best rate for newly invested money is 1.5% currently, CPI is currently 1.6% annually Sacrifices yield in return for security and liquidity Sacrifices yield in return for security and liquidity Alternative options - sacrificing security and/or liquidity in favour of yield Alternative options - sacrificing security and/or liquidity in favour of yield Higher risk financial institutions offer up to x% for 2 years or y% for 4 years Higher risk financial institutions offer up to x% for 2 years or y% for 4 years Risk: insolvency, difficult to quantify Risk: insolvency, difficult to quantify Shares offer higher rates of return (~6% above inflation?) Shares offer higher rates of return (~6% above inflation?) investment over 5-10 years investment over 5-10 years perhaps ~20% risk of capital loss unless control of exit date is surrendered and we have guts through downtimes perhaps ~20% risk of capital loss unless control of exit date is surrendered and we have guts through downtimes Bonds and property have not yet been fully investigated Bonds and property have not yet been fully investigated Bonds offer more modest returns on average (~1.4% above inflation?) Bonds offer more modest returns on average (~1.4% above inflation?) Property not yet investigated, need to consider commercial vs residential Property not yet investigated, need to consider commercial vs residential Paying down our pension debt a serious option Paying down our pension debt a serious option effectively investing in a basket of professionally managed shares/bonds effectively investing in a basket of professionally managed shares/bonds Recommendation Recommendation No change at present time No change at present time If possible quantify pension debt and pay-down options If possible quantify pension debt and pay-down options If Council has appetite for risk, complete investigation of corporate bonds & property If Council has appetite for risk, complete investigation of corporate bonds & property Review at next meeting Review at next meeting © Bishop’s Stortford Town Council