Fitch: Local government investment pools' asset growth remains strong

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The fund and asset management group at Fitch Ratings has developed two indices tracking Local Government Investment Pools (LGIPs), the agency said Thursday.

A new dashboard report from Fitch says the combined asset growth for the indices remained strong during the first quarter of 2019. Fitch said the primary driver for the inflows is the seasonal nature of LGIP participants’ tax collection schedule.

“Historically, asset flows into/out of LGIPs have followed a relatively consistent cyclical pattern, with heightened cash inflows during the first and fourth quarters of the year and slowdowns during the late summer/early fall months when tax collection revenues are limited,” Fitch said in a statement.

Fitch’s new indices are called the Fitch Liquidity LGIP Index and the Fitch Short-Term LGIP Index. The inaugural edition of the dashboard looks at the increase in assets in the first quarter of this year, rising yields in line with interest rates and the potential for increases in duration if the Fed’s monetary policy turns more accommodative.

“An extended pause or decline in interest rates could pressure LGIPs to extend durations in order to sustain yields,” said Greg Fayvilevich, senior director at Fitch. “Longer durations have a marginally negative effect on Fitch’s risk measures, although Fitch-rated LGIPs have cushions relative to existing ratings.”
The Fitch Liquidity LGIP Index is comprised of LGIPs which are like money market funds which adhere to Rule 2a-7 of the 1940 Act. Fitch said that these LGIPs generally seek to maintain a stable net asset value (NAV) and follow most of the Securities and Exchange Commission’s regulations applicable to money market funds. The LGIPs included in this index invest in high credit quality securities and aim to maintain a weighted average maturity of less than 60 days and a weighted average life of less than 120 days.

The Fitch Short-Term LGIP Index is made up of LGIPs that are comparable to SEC-regulated short-term bond funds. These will usually have longer maturities, higher yields, and sometimes lower credit quality than the Liquidity LGIPs. The LGIPs included in the Fitch Short-Term LGIP Index operate with variable NAVs and maintain durations in the range of approximately one to three years.

Both of Fitch’s indices use data from a select group of LGIPs with around $241 billion in assets under management, managed both internally and by external asset managers, and for the benefit of statewide or local government participants in the U.S. Fitch picked these LGIPs based on size and availability of publicly reported information.

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