Establishing best practices in the form of ongoing reviews of management and investment guidelines combined with strong liquidity management are critical to the success of local government investment pools (LGIPs), according to a Fitch Ratings report.
For Fitch rated LGIPs, pivotal to the rating is credit analysis which includes an examination of the pool’s overall credit quality and diversification as per its investment policy, an in-depth analysis of portfolio liquidity relative to shareholder composition, and the investment capabilities of the pool’s manager. Additionally, ongoing surveillance is an integral part of the ratings process.
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Fitch notes that the investment authorization granted to LGIPs is generally derived from the state statute in which the LGIP resides. Fitch rated LIGPs employ additional oversight including but not limited to a board of trustees and various forms of public disclosure.
As with regulated funds, LGIP investments are not insured or guaranteed, exposing participants to credit, market and liquidity risks. In some cases, pools have incurred losses, despite generally very strict investment standards.
Similar to other financial vehicles, LGIP strategies have become more conservative, allocating larger percentages of the portfolio to that which is deemed liquid and high credit quality. Fitch has observed a significant increase in the use of treasury and government agency securities. Furthermore, many of the pools that invest in lower rated securities have decreased their exposure and duration on those names.
Simultaneously, Fitch believes pools have become more transparent, through disclose of policies and portfolio holdings on their websites. These disclosures are generally in line with those of regulated funds.
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