An option open to NSW councils seeking additional yield is an investment with NSW Treasury Corp (TCorp) in the TCorpIM Funds.
TCorp does not guarantee the TCorpIM Funds as TCorp is the fund manager and investments in the TCorpIM Funds are assets or liabilities of TCorp nor any other investment manager, rather they are exposures to the assets in the underlying funds purchased by TCorp as per the TCorpIM offer documents for the four funds listed below.
1. TCorpIM Cash Fund: this fund invests in short term Australian cash and fixed interest securities and seeks to generate a relatively stable income over the short-term. The performance of the fund relative to its benchmark, should be assessed over rolling one-year periods.
2. TCorpIM Short Term Income Fund: this fund invests in short term Australian cash and fixed interest securities and seeks to generate a relatively stable income over the short term. This fund can invest in longer dated credit and fixed income securities. The performance of the fund relative to its benchmark, should be assessed over rolling three-year periods.
3. TCorpIM Medium Term Growth Fund: this fund is a diversified fund that invests in a blend of growth and defensive asset classes. The fund seeks to provide potential capital growth while maintaining a high exposure to defensive assets.
4. TCorpIM Long Term Growth Fund: this fund is a diversified fund that invests in a blend of growth and defensive asset classes. The fund seeks to provide considerable exposure to growth assets, while maintaining some defensive assets.
In the case for the TCorpIM Cash Fund, which is held by many NSW councils, all the assets in the Cash Fund will be rated and most of them highly rated. However as it is a fund, it has no maturity date. A traditional S&P bond rating is an assessment of the risk of loss of interest and principal when due. Hence this fund or any of the other TCorpIM Funds are not explicitly rated and because of mark to market movements if investors withdraw money then they could get back less than initial investment (i.e. take a loss) depending on timing. The return from all the TCorpIM Funds is variable and could be negative depending on the underlying assets. The funds do however have varying degrees of risk with the Cash Fund having the lowest risk of loss and the Long Term Growth Fund the highest risk of loss.
Most investors accept the Medium and Long Term growth funds are not conservative investments as they contain allocations to growth assets, but many conservative investors have also invested in the Short Term Income and Cash Funds and consider these low risk investments that should have “shadow ratings” to best reflect their risk so the they can be added to the appropriate credit ratings band within their investment portfolio as per policy limits.
One way of determining a shadow rating is to look at the lowest rated asset in the fund and say this is the risk of that asset defaulting and as a fund investor my risk of having a loss. However this is very conservative as the fund is generally diversified and the impact of any one asset defaulting will be small. Further within the TCorp Cash Fund, many of the assets are short-dated so carry less risk. For example, the rating of a bank bill from a Major Bank is A-1+ short-term (although the Major Bank has a AA- long-term rating), but A-1+ short-term is the highest rating achievable and entities rated from AAA to AA- all have A-1+ short-term ratings so there are arguments that a bank bill from a Major Bank that has an A-1+ short-term rating is really a “AAA” risk even though the Major Bank is rated “AA-” long-term.
Another factor to consider is that due to low interest rates and market volatility there were months during 2020 when both the Short Term Income Fund and the Cash Fund had negative monthly returns effectively meaning investors would have lost a small amount of their principal investment had they invested and withdrawn monies across those months. The risk of this re-occurring in 2021 or subsequent years remains very high when interest rates are so low as any future interest rate rise will cause a capital loss which could be greater than the interest income earned across that month producing a negative monthly return.
