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Institutional investors must get better grasp of dealing costs, says CEM

Asset owners need to understand the material nature of transaction costs to their overall investment bills, according to a new study by CEM Benchmarking.

In a report on the impact of transaction costs among large asset owners around the world, the data and analysis company found that transaction-related charges made up an average of 24% of the total cost of investing.

Across its sample of 19 pension funds and sovereign wealth funds running more than €2.2trn, asset owners paid an average 86.3 basis points for investments, of which 20.2bps on average went to transaction costs.

This was around the same level as performance fees and about half that of base manager fees or internal management costs, CEM Benchmarking said.

The firm said its international study was one of the most detailed ever done on the subject and gave an indication of the overall size of these costs for the first time.

John Simmonds, UK principal at CEM Benchmarking, said: “Transaction costs make up a significant part of the investment costs incurred by institutional asset owners.”

Where individual asset owners sat in the range of transaction costs revealed in the study depended on asset mix, volumes of trades, estimates of spreads – or simply whether they were paying more or less than others for similar activities.

“These criteria are all possible to monitor and manage as part of regular cost assessment, so institutional investors need to better understand these costs and the factors that drive them,” Simmonds said.

He added that there had been a push for cost transparency around the world, but getting the data was the first and hardest part of this effort. 

“What comes next is a comparison with others on a sensible basis to determine if those costs are reasonable,” he said.

Data from the regulator in the Netherlands – which places a particular emphasis on cost efficiency – showed that, in 2017, schemes spent an average 38.5bps on asset management costs. However, this ranged from 9bps to 162bps across the 231-fund sample.

Similarly, transaction costs averaged 9bps, but ranged from 1bps to 40bps.

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