News & Views

Execution Pt2: how to avoid leaking value

It’s also the case that there is an element of negotiation between trustees and a newly appointed manager. We estimate that this often results in costs coming down by about 0.03%. 

Crucially, however, by focusing on explicit costs, trustees are failing to pick up the significant differences in dealing efficiencies that can exist between managers. 

We at IC Select calculate that using an efficient manager – one that utilises market awareness, technology and techniques such as crossing and aggregation to reduce dealing fees – can save a scheme around 22 basis points, or 0.22%, a year in execution costs. By not homing in on dealing efficiency, trustees risk losing far more than they might save by negotiating explicit fees down.  

This leaking of value mounts up: for a pension scheme with £250 million of assets under management, using a manager that deals inefficiently could lead to up to £2.75 million in lost value over five years. That is a significant amount. 

We think that all fiduciary managers should seek to measure the efficiency of their execution, and frankly, we find it extraordinary that they don’t. If trustees don’t ask questions of their fiduciary managers about the efficiency of their dealing costs, they will continue to pay the price of a manager’s indifference. 

In our previous commentary, we highlighted how important it is for trustees to ensure they receive the right information about their fiduciary manager’s execution costs. By this we mean not just the basic quantum of the charges they pay for executing securities transactions, but also the efficiency of the way they do it. 

We think this issue is so important that it’s worth going into more detail, so we’ve decided to write a follow-up.

When pension trustees set about the process of selecting a fiduciary manager, they – rightly – put significant emphasis on cost. Typically, this means they focus on the explicit fees being charged by the fiduciary fund manager and, if it uses a third party manager, the charges that these managers levy for execution. 

Of course, transaction fees will vary depending on the securities bought and sold, and how actively managed the portfolio is. If trustees want to bring these costs down, they can do so by simplifying their asset allocation, although this can risk skewing returns or mismatching assets and liabilities.