UK – Global investment consultancy and services firm, Frank Russell Company has suggested nine points of its own to add to the 10 questions pension fund trustees should ask themselves about transaction costs, as outlined yesterday in the final Myners’ review code.
Says Bob Collie, director of consulting at Russell in London:“This final version of the code raises the standards against which the management of UK pension funds is to be measured. If the industry is able to meet the challenge laid down here, it will lead to a more professional and business-like environment.”
Russell, which took part in the consultation period of the Myners’ review, believes that the code should lead to improved management of pension funds, but that trustees also need to look at commission recapture programmes that can help them reclaim some of their costs.
Adrian Jackson, director of transaction services at Russell, says that trustees are not giving enough attention specifically to manager transactions and foreign exchange dealings, and believes that Russell’s nine additional questions should be considered before trustees look at Myners’ 10.
Russell’s nine questions (in relation to fund managers) are :
1) What systems are in place to gather information about commissions, taxes and other explicit costs of trading that are being incurred on each of the fund's portfolios?
2) What systems are in place to gather information about spread, market impact and other implicit costs of trading that are being incurred on each of the fund's portfolios?
3) Are fund managers required to report on:
the explicit and implicit costs incurred, as described in Q1 and Q2 above,
the benefits to the fund and to themselves that are obtained in return for these costs,
how the fund manager evaluates the benefits against the costs when formulating a dealing policy, having regard to execution, soft and non-soft services both separately and in aggregate,
the way in which all sources of liquidity are considered, including new or alternative sources, and in particular, how brokers are evaluated and selected?
4) Has consideration been given to other means (e.g. commission recapture programmes) of controlling costs or maximising the associated benefits to the fund?
In relation to portfolio transitions:
5) Has the fund's policy towards control of all explicit and implicit costs associated with portfolio transitions been determined after considering the full range of options for managing these events?
6) What systems are in place for the reporting of the explicit and implicit costs incurred in portfolio transitions and the associated benefit for the fund or the transition manager?
In relation to effective portfolio management:
7) What systems are in place to cost-effectively implement such aspects of the investment programme as rebalancing and the equitisation of cash?
In relation to foreign exchange dealings:
8) What systems are in place to monitor and manage the rates being obtained on foreign exchange dealings?
In relation to costs associated with custody services:
9) Do we have a clause in our Custodian Services Agreement that obliges our custodian to declare all sources of income, direct and indirect, that arise to them as a result of their custody of this fund?
Myners’ 10 questions are :
1) What is your best view of the level of transaction costs – including not only commission but also market impact and opportunity cost - borne by our fund during the reporting period?
2) What action have you taken to minimise transaction costs while still dealing effectively?
3) Please explain any major differences between the level of costs incurred by you on our behalf and those incurred by other managers in reputable surveys.
4) Were commission rates uniform across all transactions, and if not, what determines the commission rate on a transaction?
5) Which dealing venues and methods did you choose for our portfolio, why, and how did your choices affect our dealing costs?
6) Which brokers did you deal through and how did you select them?
7) Where you are not using an execution-only broking service, please list other services that you buy or benefits that you receive from the broker concerned (such as research and access to IPOs). Please explain how you evaluate the benefit these generate for us relative to the cost.
8) If you make use of both external research and in-house research, explain what distinguishes the two and how you decide which to use.
9) Explain your rules on entertainment of your staff by brokers and those with whom you transact on our behalf where we bear the cost. Make available the records you keep, your policy guidelines and the approximate number, type and overall value of the events attended.
10) If you wish to make a case for soft commission arrangements, explain how our interests are better served by the broker providing you with services rather than securing lower commission costs for us.