TAMPA, Fla. - American Indian nations looking to invest casino and other
profits can achieve higher returns than money market funds at minimal added
risk, according to an investment banker for one of the top Wall Street
Frank Marckioni, managing director of Merrill Lynch Investment Managers,
told the Tribal Wealth Management Conference here Nov. 15 - 17 that
increasing returns on cash provides an immediate benefit to a tribe's
In the current low interest rate environment, though, money market funds
are yielding very low returns of 1 percent - 1.5 percent, he told the
Money market funds are safe, liquid and flexible, Marckioni said, "a
tremendous way to invest." But by going just outside the basic parameters
of money market investing, tribes can get a higher return and still be very
He said there are four basic parameters of money market investing, as
established by the Securities and Exchange Commission: 1) A maximum 90 day
portfolio average life; 2) A maximum 25 month maturity for government
bonds; 3) A maximum 13 month maturity for non-governmental funds; 4) A
maximum 5 percent allocation for second-tier credit.
But by taking "one step outside" those parameters, such as a 14 month
maturity, tribes will find a higher return for just an additional 30 days
For Treasury bills, he advocated investing in six month T-bills rather than
those with a three month duration. Over the years this has realized a
"consistent" extra return of 24 to 34 basis points. (A basis point is one
one-hundredth of a percentage point. Thus, 24 basis points amounts to .24
percent and 34 basis points is .34 percent.)
One to three year term asset-backed securities have yielded 38 basis points
(.38 percent) more than Treasuries of the same duration recently, Marckioni
said. ABS are made up of receivables from credit cards, home equity loans,
automobile loans and the like and can be quite risky, but Marckioni
advocated buying only those that have achieved an AAA rating through credit
enhancement or insurance.
"We're not rolling the bones here to pick up money for our clients," he
said. Rather, the strategy is to go "one hair outside" the standards to get
a higher yield.
Marckioni outlined a proposed investment policy following these guidelines.
In it, the average life of any investment would not exceed 180 days, nor
would any individual security exceed three years.
Eligible instruments would include Treasuries or bonds guaranteed by the
federal government, federal agency paper, money market instruments,
repurchase agreements and asset-backed securities. There would be no
concentration limit on government bonds, and a 3 percent of portfolio limit
on any other issues. Instruments would need to be investment grade (single
A) or above.
Returns achievable above money market funds would be 20 to 35 basis points,
he said. To quantify that, on a $1 million investment the extra would be
$20,000 to $35,000.
There is a slight tradeoff on relative liquidity on this strategy, he said.
This strategy works best for monthly liquidity rather than daily, he said.
On the same panel as Marckioni, Allister McRae, an officer of institutional
investor sales for KeyBanc Capital Markets Inc., told the meeting tribes
should "jumpstart their portfolios" with excess cash from their operations.
With interest rates starting to rise (the Federal Reserve Board has raised
short-term rates four times this year), "investors should reduce their
interest rate sensitivity" by reducing the maturity of their investments
and switching from fixed-rate to floating-rate investments.
He outlined a complicated list of liquidity management products tribes can
use, including money market instruments, depository products, fixed-income
paper and tax-free securities.
The third panelist, Gautam Vora, professor of finance at the University of
New Mexico, said tribes are stuck in the middle of a financial storm that
includes influences from academia, financial markets, tribal conditions and
expectations, and legal and regulatory developments.
Dr. Vora is also a partner (with Jerome Pfeffer) in Tribal Finance &
Investor Group of Albuquerque, N.M., an education and training group.
Vora said tribal leaders need to be wary of new investments because they
will in some cases be taking on personal fiduciary responsibility. "Tribal
leaders must have sufficient knowledge" to take these new responsibilities
on, he said.
He advocated tribal investment workshops as a good way for tribal leaders
to get keep up with the investment curve.