by Jane Kawar, Head of Product Development, RBS Asset Management Limited
In this article, Jane Kawar, Head of Product Development at RBS Asset Management Limited, the Royal Bank of Scotland’s active cash and fixed income asset management business, explains tri-party reverse repurchase agreements (’repo’) which can provide higher returns than typical money market funds, but still focus on capital preservation.
Money market fund managers are having a tough old time eking out a decent yield at the moment. Historically low interest rates, bank downgrades, and regulatory and rating agency constraints have all helped contribute to a lacklustre yield environment.
Of course, maintaining a stable net asset value and providing investors with daily liquidity are the most important attributes of a money market fund and yield should be seen as tertiary. However, current yield conditions should be causing portfolio managers to look at different sources of return with a view to expanding their product offering to include higher yielding products that don’t compromise capital preservation. Tri-party reverse repurchase agreements or ’repo’ offer this potential.
What is a repo?
In simple economic terms repo can be considered equivalent to secured lending to a bank or other financial institution. Like fixed term deposits, repo aims to protect your initial capital, your return is known at the start of the transaction and you enter into set maturities, e.g., daily, weekly, monthly or yearly. So for example, you could enter into a 1 month £ repo for £100m. At the start of the transaction the counterparty would let you know the annual % return you would receive at maturity, e.g., 1.00%. At the end of the repo term you would receive £100,002,739.73 (i.e., £100m * 1.00%/365).