AS a result of new regulations being proposed by the Financial Services Commission (FSC) on repurchase agreements or ‘repos’ fixed-income investors will have to adjust their strategies. Fixed income investors are often characterized as investors that have a low-risk tolerance or have a low ability to take on risk. A large number of Jamaicans fall into this category hence the growth of the investment called the repurchase agreement or repo for short.

Contrast this investment strategy to equity investors who are more comfortable with risk, fixed-income investors are typically looking for a constant and a secure return on their investment. For example, a retired person may be looking for an investment that gives a regular dependable investment but does not use up his principal. Alternatively, fixed-income investors who are not retired simply cannot stand the thought of the possibility that when they invest their hard-earned funds they may not get all of it back when they exit their investment, as is the case with stocks. The investor simply wants to know that their principal is not at risk and that they are getting a predefined interest on

their investment.

Unknowingly these risk-averse investors are actually increasing their risk by investing in repos because oftentimes they can also invest in the same securities that the broker is investing in directly. In the case of repos, the investor is depending on the broker to be financially solvent in order to pay them their principal and interest, as well as the issuer of the government and corporate securities to be financially solvent as well.

So it makes sense to cut out the middle man and invest in the securities directly. Brokers will typically charge a small transaction charge to purchase the security, but after that the security is the investors’ so no more broker risk. How can you do this? One strategy is to invest in bonds. A bond that makes periodic payments annually and then repays principal when it matures would be a suitable investment, in this way, when the bond matures the investor would have his original investment returned to him.

We note that one reason investors like repos compared to bonds is that they don’t have to do research on the issuing entities. However, with the changes being proposed by the FSC, investors now have the opportunity to partner with their investment advisor to find the right bond or bond-type product that will meet their income needs.

Bob Russell is the assistant vice-president, structured finance at Mayberry Investments Limited. He can be contacted at bob.russell@mayberryinv.com.