Consultant says it is first to 'cost' fixed income transactions

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A German investment consultant has developed what it claims is the first methodology to measure the overall cost of fixed income transactions
Baden Soden- based consultant, Alpha Portfolio Advisors GmbH, says its methodology makes it possible to measure for the first time all fixed income transaction costs, including realised bid-ask spreads, timing costs and custodian fees.

“While transaction cost analysis is established standard for equity managers there has been no comparable analysis available for the fixed-income world.” Christoph Kesy, manager of the project at alpha portfolio advisors “We have derived completely new and important results for asset managers, institutional sponsors, consultants, transition managers , brokers and trading systems providers.”

The Alpha Advisors study is based on the bond transactions during the last quarter of 2003 of a peer group of 11 European asset managers managing more than €840 bn in equities and bonds. The group included seven German asset managers covering more than half of the German market , and the European asset management arm of Goldman Sachs.

The study analysed more than 12,600 bond transactions with a transaction volume of €32bn in European government bonds , Jumbo pfandbriefe and European corporate bonds over a three month period last year.

It found that the volatility of timing costs - the costs of deferred execution - is substantial for all bond classes. “That means the time between investment decision and order execution induces significant unsystematic risk to the investment.” Kesy said.

The study analysed the realised bid-ask spread – the difference between the realised trade price and the fair market mid price at the time of order execution. - for different bond classes. It found the spread was 2.6 for European bonds generally, 2 for EMU government bonds, 3 for non-EMU government bonds 2 for Jumbos , and 6.7 for corporate bonds.

It also looked at custodian fees and found that the volume weighted average of custodian fees - ticket fee against turnover fee - was 1.4 basis points
The study found significant differences in execution costs for corporate bonds. Order executions through a trading desk had 3.2 basis points lower transaction costs in terms of bid-ask spreads compared with direct order executions through portfolio management. Order executions by the custodian bank had 2.5 basis points higher transaction cost in terms of bid-ask spreads, compared with corporate bond order executions through ‘neutral’ brokers.

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