This month Money Fund Intelligence interviews Public Trust Advisors LLC Chief Investment Officer Randy Palomba and Head of Portfolio Management Neil Waud. Public Trust manages approximately $25 billion, including more than $18 billion of the estimated $200-300 billion local government investment pool marketplace. LGIPs are run similarly to money market funds and are used by local governments to manage cash. Our Q&A follows. (Note: This interview is reprinted from the January issue of our flagship Money Fund Intelligence newsletter; contact us at inquiry@cranedata.com to request the full issue. Note too: Our Money Fund University wraps up this morning at the Hyatt Regency in Boston. Feel free to stop by for the morning sessions if you're in the area, and thanks to those who attended!)
MFI: Give us some history. Palomba: Public Trust opened its doors in November of 2011 and assumed management of COLOTRUST, a local government investment pool for Colorado, shortly thereafter. With COLOTRUST, my history dates back to 1989.... I assumed the duties of portfolio manager in 1995 and continued through a change in administrator and investment advisor in 1998 (when COLOTRUST selected MBIA as its service provider). I eventually left Cutwater Asset Management (previously MBIA) in July of 2011 ... to co-found Public Trust.... COLOTRUST wanted to explore other service providers in the market place. We were fortunate enough to be awarded the contract and have been managing those assets ever since. Fast forward to today, and we have grown to manage several more clients, so it has been a very positive story.
MFI: What is your biggest priority? Palomba: Our mantra, and we live by it through any kind of market cycle, is "safety, liquidity, and then yield." At Public Trust, we have developed a true investment team environment.... We work on these portfolios with a collaborative effort, where there is constant communication and a flow of ideas being generated.... This gives us the opportunity to bounce ideas off one another, thoroughly analyzing all aspects of our investment process. We meet frequently to set overall strategy, then Neil and I determine the assets to purchase for the various portfolios.
Our primary focus is safely managing cash for local governments in eight different states, all with differing tax cycles, cash flow requirements, and, in some instances, different funds within an LGIP. In both Colorado and Texas, we manage two LGIP funds per state, one government style and the other prime. We manage an LGIP in New York that is a U.S. Treasury only pool, and we serve a prime-style LGIP in Michigan that has seen exciting growth.... Additionally, we are contracted to manage a state-sponsored LGIP in Indiana, where we work closely with the state treasurer and her staff. In Florida, we manage a start-up, prime style LGIP that recently crossed the $2 billion mark.... Lastly, we manage two LGIP funds in Virginia: a liquidity portfolio ... and a longer term, 1-3-year portfolio.
MFI: What is your biggest challenge? Palomba: It is a combination of several things. It is finding supply as well as value.... We see different things occur over different market and economic cycles. When money market reform was phasing in during 2016, we saw a rather dramatic shift in the marketplace. With the changes in regulation along with the evolution of the Federal Reserve’s monetary policy, it has been a challenge to stay one step ahead while prudently managing our clients' funds.
We have expanded our credit team to five, having recently added two more senior analysts. [This] has allowed us to work diligently on analyzing our credit exposures, constantly reviewing issuers and weighing the risks against the opportunities. The issuers we approve are high-quality, liquid names. We also guard against credit migration, a critical consideration when managing LGIPs that are rated 'AAAm' by S&P Global Ratings.... We often manage to a stricter mandate than typical state statutes or an individual investment policy may require. Waud: As Randy mentioned, we have significant history not only with Public Trust but with managing these specific LGIPs. We first address the issues of safety and liquidity. But to maximize yield after the first two initiatives have been met, you really need to know your clients and their historical cash flows. There must be commitment from our team to communicate that with the fund participants to ensure we always have sufficient liquidity. On the flip side, though, not too much liquidity, which generally hurts returns.
MFI: Do you run mostly government? Waud: We run the spectrum. As mentioned earlier, the LGIPS in both Colorado and Texas have prime and government funds whereas the LGIP in New York is mainly a Treasury only fund. Really, each portfolio has its own identity, like the LGIP in Indiana, which has specific state guidelines mandating that half of the money must be deposited in state approved banks. Many of the pools are very similar in their mandates, but of course, there are nuances to each fund. We have internal guidelines that are broadly applied regarding the use of credit and exposures, and S&P layers guidelines on top of that. There is consistency with names that we buy across the funds, but seasonality of cash flows makes for variations on how we employ various strategies during the year. By and large, we manage these funds in a similar manner.
Palomba: We are buying relatively large blocks of commercial paper programs.... We do not want to have an outsized position in any commercial paper name, so if we choose to sell the paper, it would not be into a limited market space. We always look for programs with multiple seller groups so that we can get three or four bids if we do want to sell a piece of paper out of a portfolio.
MFI: What are customer saying now? Palomba: We have a top-down approach when it comes to how we communicate with our clients and the LGIP participants.... Most have elected boards that are representative of the types of entities in the program. Public Trust hosts quarterly board meetings where we talk to them about what is going on in the portfolios and in the markets.... We have implemented technology and procedures to provide a high-degree of transparency, based on real-time, secure account access and transaction capabilities [and] we publish a great deal of information that goes beyond daily yields and WAMs.
I think it is a welcome relief for these local governments to see a little additional income start to come back into their funds. Interest income used to be a significant line item in their budget when entities had reserves earning 5 or 6 percent. Waud: I would say the participants have certainly noticed the higher rates, and are paying closer attention as rates continue to push higher.
MFI: Did LGIP regulations change too? Palomba: In October 2016, the Securities & Exchange Commission made several changes that impacted prime style funds. However, most LGIPs were able to maintain their stable NAV. In Colorado, for instance, the Colorado State Regulator came out with a GASB ruling regarding liquidity. However, we operate under FASB instead of GASB for the funds in Colorado. We worked with the Regulator's office to permit both accounting methods, allowing COLOTRUST to continue to operate as it has since inception. For the funds we manage at Public Trust, it was more of a matter of seeing how each state was going to react to money market reform.
MFI: Do you run any ultra-short funds? Waud: We do. As we mentioned, we have one fund in Virginia that is managed to the Merrill Lynch 1-3 double-A gov-corporate index, and then we have another $6-7 billion in separately managed accounts on a discretionary and nondiscretionary basis. That certainly is an area of focus for us, as we have sizable assets in that space, as well.
MFI: What is your outlook for 2018? Waud: The Fed is indicating three rate hikes and taking a leap of faith on its medium-term inflation outlook. I think the big X-factor for us is tax reform. With corporate taxes getting cut back, that should in theory be a stimulus for growth. But what do corporations actually do with those funds? Do they pay back shareholders? Do they invest to boost productivity? We will have to wait and see. We are also looking at global central banks. We know that the ECB and the Bank of Japan are operating in a highly accommodative manner, purchasing assets and producing negative interest rates. As those economies improve, do they ease off the throttle or even reverse course? What is the overall impact? What happens to the Treasury curve? To Public Trust? If the global economy continues to improve in 2018, we need to be careful as we work our way back to a "normalized" rate environment.
Palomba: LGIPs have become such a common investment for local governments that they are going to continue to play a viable role in helping with liquidity. Last year, Public Trust had four LGIPs that hit record highs in assets.... The LGIP in Colorado hit nearly $8.5 billion at the end of the tax collection cycle last year. We have seen exceptional growth in the LGIPs in Texas and Florida, both of which recently crossed the $2 billion mark.
The ease at which they can either send us or request money really goes into helping them manage their cash on a short-term basis. A lot of the people that are responsible for managing these funds wear multiple hats. If we can provide a product for them that strives for safety, liquidity, and is easy to use and understand, I think that plays a very valuable role in providing a necessary service. I think we are likely to see continued growth in the public sector and use of the services offered here at Public Trust.
