More transparency is bad for pension funds? Apparently yes, according to the last survey made by Greenwich Associates among portfolio managers at more than 300 of the largest US-based institutions. The majority of them (53%) think that the financial market has changed for the worse with the introduction of Reg D, which stands for ‘Regulation Fair Disclosure’. The new rule was adopted by the Securities and Exchange Commission in 2000 and is aimed as SEC representatives put it “at curbing the selective disclosure of material non-public information by issuers to analysts and institutional investors”.
Individual investors and the media generally have been in favour of FD, believing that it would level the playing field for the retail investor. Large brokerage firms, on the other hand, generally opposed the rule, predicting that it would lead to a chilling of the information flow from issuers to the marketplace. Now comes the opinion of major pension funds and other large investors interviewed by Greenwich Associates, the Connecticut-based research and consulting firm.
The problem, according to these money-managers, is that Reg FD has increased market volatility. “In order to comply with the rule”, explains Linda Nockler, analyst with Greenwich, “now companies let information come out all at once. That contributes to roiling an already turbulent market. And institutional investors do not like turbulence. Besides, even before Reg FD they had good access to information anyway, so they do not feel they have today more instruments.”
In fact, before Reg FD many corporate managers and executives used to have more one-to-one talks with institutional investors and stock analysts, during which they could give more hints about the real situation of the company. Now, most companies tend to communicate only at press conferences, public meetings with analysts and official corporate events. One of the consequences – according to 40% of interviewed investors – has been a decreased value of broker research.
The latter is also a major concern for portfolio managers: 48% say they should direct more business to brokers with little or no conflict of interest between their research and investment banking arms (see above). Even more sensitive to them is the importance of being informed about the positions of equity analysts: who owns stocks he is rating must disclose it. But the majority (55%) of the same portfolio managers disagree with the notion that these analysts should be prohibited from owning stocks they rate. Some investors would prefer it if analysts did with their money what they recommend to the public, that is, buy (and sell) the very same stocks at the very same moment their clients are invited to do so. Maybe that would encourage more responsibility in issuing a “strong buy” or “buy” comment.
A third hot issue among US pension funds is about cutting costs. “The current long bear market has changed the attitude,” says Nockler. “The typical institutional portfolio’s assets fell by 26.5%, from $18.1bn (E19.7bn) in 2000 to $13.3bn in 2001, according to our data. That is why money managers are more and more focused on becoming cost-efficient, in many different ways”.
The first way is that of cutting listed commissions for trading shares: the average fell from 5.3 cents/share in 2000 to 5.1 cents/share in 2001 and institutions are expecting it to fall to 4.8 cents/share this year, as Greenwich Associates reports. The second way is to increase the amount in soft-dollar trades: commission-recapture arrangements between brokers and institutions, where sometimes commissions can be redirected from a broker to a research ‘boutique’, both providing services to pension funds. The average soft amount paid last year rose 13% among institutions overall; 56% of institutions use these agreements.
Other pension funds (a percentage increased from 30 to 45% between 2000 and 2001), are switching to programme trading, saving a lot of money: the largest investors typically pay 3.4 cents/share; those with dedicated portfolio trading specialists average 2.3 cents/share.
Increasingly popular is the use of electronic systems for NASDAQ trading: 75% of institutions (65% in 2000) conduct this way 19% of their total business (it was 16% two years ago). “The average commission rate for e-trades is 3.3 cents/share and at institutions spending more than $20m it’s 2.6 cents, so it’s far cheaper than normal listed business and normal NASDAQ trading”, comments Greenwich Associates consultant Jay Bennett.
Another way of keeping costs under control and cutting them is ‘benchmarking’: 52% of large portfolio managers (45% in 2000) actively analyse and compare their trading costs; 79% of those spending more than $20m do it (they were 52% in 2000).