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Execution: the right information can cut scheme costs
Your fiduciary manager will happily tell you how much it costs to execute trades on behalf of your scheme’s investment portfolio. But that doesn’t necessarily mean that you, as a pension trustee, are getting the full picture about whether those trades are being carried out efficiently.
While it’s easy for trustees to feel overwhelmed by the amount of information their manager provides them with, it’s the quality, not the quantity, that counts. Getting the right detail – whether the trades were aggregated or crossed with others to cut costs, for example – can save a scheme money and so lead to benefits for members.
Of course, not all fiduciary managers execute transactions in the same way. Those that handle the trading process themselves can and do measure and report the efficiency of their performance; they know exactly how they execute securities deals.
When a manager uses a third party, it will assess and monitor that third party’s handling of the execution, but in practice it is unlikely that the fiduciary manager will scrutinise its efficiency in terms of costs.
Whatever their approach, all fiduciary managers will report on execution costs, using templates set up by the Cost Transparency Initiative, the independent body backed by the Pensions and Lifetime Savings Association, Investment Association and Local Government Pension Scheme Advisory Board.
To be clear, these templates are useful and provide a clear statement of costs. However, they still fail to show how efficient the execution was – costs will rise and fall based on how the scheme’s assets have been allocated (equities, bonds, hedge funds, private equity, say) and its particular investment style (active, passive, growth or value).
It’s important to be properly informed about the cost-efficiency of a fiduciary manager’s execution processes. At IC Select, we estimate that efficient execution – where transactions are handled in a way that limits unnecessary charges – could save the average fund 22 basis points a year in costs. That’s 0.22% of the scheme’s total assets under management: a considerable annual saving.
However, until all managers measure or benchmark the efficiency of their execution, many trustees will remain in the dark about whether all achievable savings have been made.