transaction costs and your funds largest expense
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Transaction Costs and Your Funds Largest Expense. 72% of Portfolio Management Expenses Are Brokerage Related!. Source: Myners Report 2001; QSG 2005. Source: Myners Report, QSG. Fiduciaries Required To Monitor Transaction Cost. Most Plan Investment Policy Statements explicitly state “Best - PowerPoint PPT PresentationTRANSCRIPT
Transaction Costs and Your Funds Largest Expense
Source: Myners Report 2001; QSG 2005. Source: Myners Report, QSG
72% of Portfolio Management Expenses Are Brokerage Related!
Fiduciaries Required To Monitor Transaction Cost
• Most Plan Investment Policy Statements explicitly state “Best Execution” Requirements
• Most Manager Contracts Also Refer to “Best Execution”
• Managers shall “Effect all transactions for the Portfolio subject to best price and execution.“ (quote from a county pension fund IPS)
“Best Execution” Has No Standard Meaning
“When it comes to defining best execution, it's often a case of, ‘I know it when I see it.’“
What Is 'Best Execution'? By Daniel Safarik, Advanced Trading, Jan 29, 2007
Industry and academic research concludes the average performance differential between the top performing broker and the tenth highest ranked broker:
4.35
5.98
16.24
-4.78
-7.05
-15.73
-18.71
-25.2
-71.26
-88.75
Broker A
Broker B
Broker C
Broker D
Broker E
Broker F
Broker G
Broker H
Broker I
Broker J
Investment Style: 178%
Small CapEquities:
220%
Large CapEquities:
130%
*Source: Vodia Group 2007
What is the Primary Determinant of Cost?
Broker Selection Is A Major Factor in Execution Quality
What Are Pension Funds Doing to Address the Issue?
Investment Review Process:
-Quantitative Manager Selection Process
-Ongoing Manager Research and Oversight by Investment Consultant
-Quarterly Performance Review by Board
Best Execution Review Process:
-No Broker Selection Process
-No Ongoing Research or Oversight of Brokers
-No Board Review of Broker Performance
Impact Of Research in Broker Selection
Fiduciary Process is Required to Fulfill The Mandates of Your IPS
Step 1 - Gain Enhanced Transparency
Step 2 – Use that Transparency as Actionable Intelligence
Step 3 – Communicate issues with Managers
Step 4 – Monitor for Improvements
Can Pension Funds Directly Effect Transaction Costs?
- Default to the Asset Manager
- Existing Relationships With Other Service Providers
- Qualitative RFP/ Bench
- Competitive Bidding Process
Event Based Program/ Portfolio Trading
The Right Way: Just Like You Select Asset ManagersI. Performance
- Liquidity Charge - VWAP - Execution Differential - Timing Consequence
II. Process
- Evidence of a repeatable approach to trade execution - Systems resources utilized in support of trading process - Trading analytics and measurement systems
III. People
- Personnel committed to program trading - Middle office staff committed to support of program traders - Personnel turnover ratios - Experience executing transition program trades - Structure of compensation programs
75% Quantitative
25% Qualitative
Same Process Used in Asset Management
Establish A True Fiduciary Process
- Quantitatively Based Broker Selection
- Conflict Free Event Administration
- Real Time Independent Trade Oversight
- Independent Pre and Post Trade Reporting
- End to End Transparency
Stephen Malinowski Managing DirectorGTS [email protected]