Jon Sheridan’s note last week suggested adding very low risk government bonds to portfolios. This note sets out the case for high grade major bank floating rate notes, particularly for corporate and not for profit investors
Capital management of mid sized companies and not for profits does not have to mean just managing a cash book. With interest rates so low and corporations facing a range of pressures, maximising returns in a low interest rate market, while taking on minimal additional risk makes sense.
Mathew Simpson, Head of Corporate Markets and Distribution, Managed Portfolios at FIIG at a recent presentation for university treasury managers stated, “Today, companies and not for profits with funds in term deposits are receiving one per cent less than five years ago, and over five per cent less than 10 years ago. Thus the need for treasury teams to look at new options that will work harder to increase returns and get better outcomes for their money, while still adhering to conservative investment policies.”
“Many higher education institutions have funds sitting in a small subset of available investment opportunities due to strict investment policies and the perceived risks with alternative options. However, many are starting to look at the opportunities associated with engaging a wider competitive universe of issuers and security types.”
“Engaging a reputable third-party can significantly reduce the facilitation and management burden of investments for a university’s finance team - driving operational efficiencies, cost savings and delivering improved governance and investment returns,” Mr Simpson said.
“Low interest rates press the need for innovative solutions, though not at the expense of conservatism. These solutions exist and we look forward to assisting the sector to navigate its way to them. ”
FIIG can assist in the following:
- Short term money market solution - Access to around 70 Authorised Deposit Taking Institutions allows us to work on your behalf to find the best quote in the market
- Bond solution - Consider using bank bonds as a very conservative complement to cash management programs, as a means to improve liquidity and yield on liquid capital reserves. At a bare minimum, Australian major bank senior debt floating rate notes (FRNs) should be comprehensively explored, given:
- They are RBA repo-eligible securities
- Bank FRNs are defined by the RBA as being High Quality Liquid Assets (HQLA)
- Negligible credit risk between major bank issued term deposits (TDs) – the government guarantee is limited to $250,000 - and senior debt issued by the same names – both products sit high in the capital structure of the issuing banks
- Zero differential in interest rate risk between bank FRNs and bank issued TDs, with each rolling every 90 Days with credit spreads over BBSW
- No break costs for FRNs, unlike TDs, with FRNs trading with strong intra-day liquidity (in ‘normal markets’) at c.1bps buy/sell spreads)
- A major bank 1 year deposit pays 0.63% over 3 month BBSW and major bank senior debt pays 0.80% over the same benchmark for a five year bond. While the terms are different, the bonds are liquid, so investors don’t need to commit for the whole term. While this sounds small it adds up. For example, on a $50m program, which is not unusual for larger corporations and universities, this will add $85,000 p.a. of additional return
We have an expert portfolio manager that can work to your specific mandate from $5m. Alternatively, you can use one of our existing mandates, including existing senior bank floating rate bonds from $250,000. Below are the key metrics and holdings for the Major Bank Senior Floating Rate Note Portfolio.
Major Bank SENIOR FRN Portfolio