Magazine article Government Finance Review

Money Management Matters

Magazine article Government Finance Review

Money Management Matters

Article excerpt

Governments Prefer Passive Management Strategy

To explore trends in the management of short-term government portfolios, GFOA conducted two surveys examining active versus passive and internal versus external management strategies. The surveys found that most governments favor a passive approach to investment and that those following this approach rarely use external managers. However, it is possible that governments use local government investment pools (LGIPs) or money markets as an indirect way to use active portfolio management.

Survey questions pertained to the management of individual securities held by the government, excluding commingled funds such as LGIPs or money markets. An active manager was defined as an investor more likely to trade securities prior to maturity, compared to a passive manager. An active investor seeks to maximize investment returns by using various techniques such as yield curve analysis or spread analysis (e.g., comparing yield spreads between different sectors of the bond market). In contrast, a passively managed portfolio emphasizes holding securities to maturity instead of trading prior to maturity. Passive techniques include liability matching, laddering, or matching a bond index.

Participants in the first survey, which was conducted in February 2001, were members of the GFOA Committee on Cash Management. With the exception of two state government members, the committee members represent primarily city and county governments. GFOA received responses from 22 of 25 members for an 88 percent response rate. In the second survey, GFOA polled all 66 municipalities with populations of 100,000-125,000 within the United States. Conducted in April, the national survey was faxed to chief financial officers, treasurers, and finance directors likely to be involved in investment decisions. GFOA obtained 36 responses, yielding a 55 percent response rate.

Committee Survey Findings

The Cash Management Committee survey reveals an even split between active and passive management styles, with 11 of 22 members using an active approach to investing, and the remainder using a passive approach. The second major finding of this survey was that about one-third of the committee survey participants use external money managers. Seven of the 22 members use third-party investment managers, whereas 15 do not. The two state government member participants actively manage their portfolios, one using strictly in-house personnel and another relying on a mix of internal and external advisers.

Lastly, the survey showed, as expected, that only one of the 11 passive managers used external advisors. In contrast, six of the 11 active managers relied on external managers to execute their investment program (Exhibit 1). The two state government member participants actively manage their portfolios, one using strictly in-house personnel and another relying on a mix of internal and external advisers.

National Survey Findings

In contrast to the Cash Management Committee survey, the survey of mid-sized cities revealed that 77 percent of shortterm portfolios are managed using strictly passive strategies, 9 percent are strictly actively managed, and 14 percent use both active and passive strategies (Exhibit 2).

However, both survey results show that the passive/active management decision appears to drive the decision to use external money managers. According to the national survey, of the 27 portfolios that are strictly being passively managed, 96 percent are managed strictly in-house (Exhibit 3). The remaining 4 percent of the passive portfolios use external advisers for a portion of the portfolio (none of the strictly passively managed portfolios are managed solely by external managers.) One representative of a passively managed government indicated that they were in the process of hiring an external manager; however, it is unclear whether they will switch to an aggressive strategy, use a combined passive-aggressive approach, or remain strictly passive. …

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