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Transaction Costs and Your Funds Largest Expense

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

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Transaction Costs and Your Funds Largest Expense

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  1. Transaction Costs and Your Funds Largest Expense

  2. 72% of Portfolio Management Expenses Are Brokerage Related! Source: Myners Report 2001; QSG 2005. Source: Myners Report, QSG

  3. 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)

  4. “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

  5. What is the Primary Determinant of Cost? Industry and academic research concludes the average performance differential between the top performing broker and the tenth highest ranked broker: Large Cap Equities: 130% Small Cap Equities: 220% Investment Style: 178% *Source: Vodia Group 2007 Broker Selection Is A Major Factor in Execution Quality

  6. What Are Pension Funds Doing to Address the Issue? Investment Review Process: Best Execution Review Process: • Quantitative Manager • Selection Process • Ongoing Manager • Research and Oversight by • Investment Consultant • Quarterly Performance Review • by Board • No Broker Selection • Process • No Ongoing Research or • Oversight of Brokers • No Board Review of • Broker Performance

  7. Impact Of Research in Broker Selection

  8. 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

  9. Can Pension Funds Directly Effect Transaction Costs? Event Based Program/ Portfolio Trading • Default to the Asset Manager • Existing Relationships With Other Service Providers • Qualitative RFP/ Bench • Competitive Bidding Process

  10. The Right Way: Just Like You Select Asset Managers I. 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

  11. 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 Same Process Used in Asset Management

  12. Stephen Malinowski Managing Director GTS Advisors 610-755-3822 smalinowski@gtsadvisors.com

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