Super funds could engage in commission sharing if they are concerned that their funds managers may be disadvantaged in broker dealings in the event of adopting a master manager approach to portfolio administration, according to Investment Technology Group (ITG).
David Broadfield, the analytical products research manager for ITG, told the 2008 Investment Administration Conference that one of its clients, the Prudential Group in Singapore, had made savings, annualised, of about US$30 million by moving to a best-execution system. Work by ITG, in conjunction with data from NAB Custody, shows that broker commissions and market impact savings can total 48bps. With savings from the deferral of tax, the total savings for a fund could be 100bps.
Vicki Martyn, head of product for NAB Custody, co-presented with Broadfield on the topic of cost savings from efficient implementation at the conference. However, while many funds and consultants have expressed interest in the concept since NAB launched its service last year, some are still questioning whether the potential damage to the funds manager/broker relationship is worth the cost saving from that component of the service.
Laurence Bailey, regional head of JP Morgan Worldwide Securities Services, asked Martyn how a fund could reconcile paying its managers to manage money with the delays incurred in transacting under the master manager model. She said that the concept did not work for every manager but that studies showed that incurring delays – where the master manager transacted after the underlying manager had traded for its other clients – usually generated better performance. She said that the optimum timing of a trade was, on average, more than two days after the manager had relayed its buy/sell decision.
Broadfield said the concept of commission sharing was well developed overseas. This involved funds electing to split the broker savings with managers which could pass on a proportion to brokers for research or access to IPOs. Investigation of the master manager concept has been a major development for custodians in the past year. The concept involves a fund pooling all its managers’ portfolios for trading and tax purposes, allowing the greater use of off-market trades.
Queensland Investment Corporation has designed its own version, implemented by its ‘omega management’ team, and VFMC last year announced it would adopt Vanguard’s ‘centralised portfolio management’ service. The largest savings are said to come from the taxation element, which can be done separately from the full master manager service. DST International has had a “propagation” module in its HiPortfolio administration system for more than 10 years, which can be used for tax efficiency as well as other administration combinations.