Key Insights Into Q1 2024 LGIP Performance: How LGIPs Can Gear Up for Success With a Focus on Clear Strategy and Preparedness

This report analyzes the performance of Local Government Investment Pools (LGIPs) in Q1 2024, highlighting key trends, challenges, and opportunities. Top-performing LGIPs achieved yields above 5.41%, with increased diversification playing a crucial role. Federal interest rates, changing asset allocations, and an increasing focus on liquidity shape the LGIP landscape. The upcoming elections and potential Fed rate cuts will necessitate strategic adjustments. Future success in LGIP management will require transparency and the utilization of advanced technology. 

LGIPs are essential for managing public funds, providing state treasurers and portfolio managers with a means to optimize returns while ensuring liquidity and risk management. According to S&P Global, “LGIPs maintain a competitive edge net of fees as they outpace bank deposits and institutional money market funds. Following the U.S. Federal Reserve’s rate hikes in 2023, LGIP seven-day and 30-day net yields remain above 5%.” As the financial landscape evolves, transparency and strategic adaptation become increasingly crucial. This report delves into the key insights from Q1 2024 LGIP performance data, the impact of federal interest rates, asset allocation trends, and the importance of leveraging technology for success.

Key Insights from Q1 2024 Performance Data 

• Top Quartile Performance: The top 25% of LGIPs achieved yields above 5.41%, highlighting effective investment strategies. The top three performers were: 

• South Carolina LGIP: 5.573% 

• Connecticut STIF: 5.570% 

• West Virginia Money Market: 5.533% 

• Median Performance: The median yield for LGIPs was 5.38%, which aligns with industry benchmarks. For example, the average net yield for the Fitch Liquidity LGIP Index was 5.34%, while the S&P LGIP 30-Day and 7-Day Net Yields were 5.36% and 5.37%, respectively. The landscape is competitive, where many states have achieved yields close to or above the Fitch and S&P benchmarks. 

• Bottom Quartile Performance: The bottom 25% of LGIPs had yields below 5.31%, indicating areas for potential improvement. 
• Diversification: The higher-yielding state pools tend to be more diversified outside US Treasury securities and US Government Agency bonds. For example, the top three performing pools have an average allocation of 6% in US Treasury securities, while the bottom three have an average allocation of 41.23%. 

Impact of Federal Interest Rates 

• Interest Rate Environment: The Federal Reserve’s decision to hold interest rates steady has influenced the weighted average maturities (WAMs) of LGIPs. The WAM of the Fitch Liquidity LGIP Index decreased to 39 days, reflecting a cautious approach amid uncertainty about future rate cuts (Fitch Ratings, 2024). 
• Yield Profiles: Both the Fitch Liquidity LGIP Index and the Fitch Short-Term LGIP Index saw decreased average yield profiles, with net yields of 5.34% and 4.54%, respectively. This highlights the need for deliberate adjustments to optimize returns in a fluctuating interest rate environment (Fitch Ratings, 2024). 

Asset Allocation Trends 

• Shift in Allocations: There has been a notable change in asset allocations within LGIPs. According to Fitch Ratings, the Fitch Liquidity LGIP Index increased exposure to commercial paper (CP) by 1.14% and decreased exposure to government agencies by 1.82% quarter-over-quarter (QoQ) (Fitch Ratings, 2024). 
• Stable Allocations: Public agency investment assets remain concentrated in Treasuries, bank deposits, and federal agency securities, representing about 60% of portfolio assets (Pub Funds, 2024). 

Growth and Liquidity Trends

• Slowing Growth: The Federal Reserve’s Financial Accounts report shows state and local government assets grew only 0.6% in Q1 2024 and 4.3% for the 12 months ending March 31, 2024. This is slower than the growth rate over the last five years (Pub Funds, 2024). 

• Increased Liquidity: Investment managers are bolstering liquidity to prepare for potential budget needs, making greater use of LGIPs that have immediate liquidity despite the opportunity to lock in longer-term investments at high yields (Pub Funds, 2024). 

What’s Ahead 

• Federal Reserve Rate Cuts: The Federal Reserve is expected to cut rates this year, impacting LGIP performance. Pools with longer weighted average maturity (WAM) and duration may maintain performance better in a declining rate environment. However, managers must balance the need for liquidity with the potential benefits of longer-term investments. 

• Presidential Election Impact: The upcoming presidential election could significantly impact investment strategies. A Republican presidency might focus on deregulation and tax cuts, potentially boosting economic growth and interest rates. Conversely, a Democratic presidency might emphasize regulatory oversight and fiscal stimulus, which could affect market stability and interest rates. Both scenarios require LGIP managers to stay agile and frame their strategies accordingly. 
• State Treasurer Elections: The state treasurer position exists in 48 states, with 36 elected and 12 appointed. This November, ten states will hold state treasurer elections, including Arkansas, Pennsylvania, Utah, and West Virginia. Changes in state treasurer leadership could shift LGIP management strategies and priorities, emphasizing the need for flexible and transparent investment solutions. 

The Imperative for Transparency  

Transparency in LGIP management fosters trust among stakeholders and enhances decision-making processes. Access to real-time, accurate data allows for more informed investment decisions, improving returns and managing risks effectively. Transparency also ensures compliance with regulatory requirements and builds confidence among fund participants. 

How Clearwater Analytics Supports LGIP Management and Strategic Adaptation 

Clearwater Analytics empowers state treasurers and portfolio managers to navigate the future confidently. Our platform provides a comprehensive view of investment portfolios, simplifying operations and enhancing transparency. Our solution ensures efficient and accurate fund management by automating critical tasks such as pool contributions/withdrawals, performance tracking, and reconciliation. Key features include: 

• Real-Time Data Access: Providing up-to-date information to make informed investment decisions. 

• Comprehensive Reporting: Customizable reports for compliance, risk management, and performance oversight. 

• User-Friendly Interface: Simplifying fund management processes and reducing manual errors. 

• Investment Policy Monitoring: Ensuring compliance with investment policies using Clearwater’s compliance tool. 

• Shock Analysis: Assessing the impact of various market scenarios on LGIP performance. 

As the LGIP landscape evolves, embracing transparency and strategic adaptation is essential for success. By leveraging advanced technology and data analytics, Clearwater Analytics offers a trusted solution to meet the changing needs of LGIP management. Visit our website to download an ebook for public sector investors, which includes a case study on the Arkansas Treasurer of State.