©  Copyright 2002 Rogers Media. The following article first appeared in the February 2002 edition of BENEFITS CANADA magazine.

At first glance the loan would only cover the transaction cost incurred. However, some of these loans can be outstanding for three years. Since transaction costs are a single occurrence, this loan can become one of a pension fund's most profitable trades. This type of business can earn a fund several hard-to-win basis points in difficult times.

Regardless of whether the markets are up or down, the repo and securities lending markets can pay you these 'free' basis points. Vigilance and a proactive market stance are required though, especially in these trying times, to ensure the high-penetration rates required for an optimal outcome. So be cautious of the large pro-rata asset lending pools.

Marrying a repo plan with an existing investment operation allows fund managers to be more proactive and profitable with their cash and collateral management activity. This added flexibility gives them access to short-term cash at a moment's notice. A good repo program also allows portfolio asset allocation to include a smaller balance in ready cash assets and vest a greater balance in those areas of higher value.

Creating either a matched or mismatched short-term portfolio, which includes a repo component, will help a fund's short-term assets' yield to move above the Canadian Treasury bill (T-bill) curve and potentially exceed the Canadian BA curve. Canadian T-bills are often negatively correlated to Canadian overnight repo rates.

One strategy available is to reduce the inventory of T-bills. This will allow the fund to use reverse repos, picking up five to 500 basis points, tailoring dates to match individual cash and collateral management needs with the same underlying credit. Repos often carry a yield which matches or can exceed that of the concurrent BA curve.

Similarly, a matched repo program allows a money manager to earn significantly more basis points on the repo side. Repoing out current inventory to your demand network, and adding a simple matched buyback investment in asset-backed securities will provide a yield above that of the BAs. At the same time the fund maintains an acceptable credit risk profile. This strategy can bolster lending revenue by 25% to 50%.

Canadian U.S. Treasury vs. Euro dollars (the domestic equivalent of U.S. Treasury vs. Euro futures, also known as TEDs) are a hedged strategy designed to use an existing money market portfolio. Assets are acquired cheaply and then sold forward in a historically expensive part of the yield curve.

For some funds, Canadian TED spreads are the ultimate well-calculated, low-risk, repo-based investment structure. They are simply an exercise in evaluating what is cheap compared to what is expensive in the front end of the yield curve.

Securities lending and repo programs are not the most glamorous aspects of the fund management business. Perhaps these two important tools are overlooked--or at least not considered strategic enough to warrant the attention they deserve--because they are low-profile and not the main concern of fund managers. In tough times like these though, fund managers need to use all the weapons available to improve yields and returns. BC

Ian Doidge is the chief executive officer of Yield Curve Solutions Ltd. in Toronto. idoidge@yieldcurve.ca.

The Romanow Commission has released its final report on the future of healthcare in Canada.

For Commissioner Romanow's recommendations, click here.

Click here for Senator Michael Kirby's report, "The Health of Canadians – The Federal Role: Recommendations for Reform."