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Impact Investing

IPE special report May 2018

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Ireland’s NPRF earns millions from stock lending

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IRELAND - Ireland’s National Pension Reserve Fund earned more than four million euros from stock lending and brokerage commission recapture in 2003, according to the National Treasury Management Agency.

The larger part of this came from the controversial practice of stock lending, which earned the NPRF net fees of 2.5 million euros in 2002 and 3.2 million euros in 2003.

John Corrigan, a director of the National Treasury Management Agency with responsibility for the 10 billion-euro NRPF, commented: “In terms of performance attribution that would be the equivalent of somewhere between three and four basis points, and we would kill our grannies for a few basis points in this business.”

Corrigan told delegates at the Irish Association of Pension Funds’ annual investment conference in Dublin that stock lending was a way of sweating the pension fund’s assets with little risk. “This essentially represents a fairly low risk approach to generating revenues from a pension fund’s assets.”

He acknowledged that stock lending was controversial. “There is a debate in the US about whether pension funds should lend stock because they encourage the activities of hedge funds, which is deemed by some market participants to be not a healthy activity.

“We take the view that securities lending is a good thing because it adds to market liquidity. And if you can add to market liquidity and can pick up a fee in the process why not do it?”

He added that before the NPRF was set up the NTMA operated a repo programme, lending to investors who want to go short of Irish government securities. “Maybe this is an activity that some people might argue we shouldn’t encourage, but we took the view that if it added to liquidity it was a good thing and if the agency could earn a fee in the process that was a double bonus.”

The NPRF also earned one million euros from brokerage commission recapture fees in 2003. “We stipulated to the fund managers that we appointed that they agree to direct an agreed percentage of their trades to recapture brokers. The agreed percentage that we’re targeting is somewhere between 25% and 30%.”

Recapture brokers rebate a portion of the commission to the intermediary and the intermediary in turn rebates the fund. This rebate can be large. In the US up to 70% of the brokerage cost can be recouped under a brokerage commission recapture programme, although the proportion is lower in less efficient markets.

Meanwhile, the NTMA said the fund is in the process of selecting asset managers for two small-cap briefs. A spokesman for the agency said it was not yet known when the appointments would be made.

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