Elvish says the prudential regulator should ask questions and audit funds the implementation costs of costs.???????? Fat fees Battye says “inflated” FX fees can erode up to 2 per cent of the value of institutional investment portfolios over 40 years. This finding is based on Russell’s analysis of 40,000 FX trades executed by investment managers with custodians and other foreign exchange counterparties between January 2008 and December 2009, on about $23 billion in institutional assets. The research shows the average cost of each FX transaction – defined as the difference from the mid-point between bid and offer prices – came to about 9 basis points. This is considerably higher than average costs in the FX market for the most-traded developed-market currencies, which is between 1 and 3 basis points. The findings are almost identical to similar research Russell did in 2004, on about 36,000 trades. Russell’s establishment of its FX agency arose from an internal audit of the custody arrangements with its multi-manager business in 2001-02. Senior managers looked at FX costs and accountability and decided to establish an in-house FX team in 2003, led by Battye, who worked for State Street and had worked closely with Russell.

What began as an educational role for external clients – one of which was the $6 billion Qantas Super – began to morph into an FX service. Andrew Spence, CIO at Qantas Super, was concerned about implementation efficiencies and initiated the fund’s two-year analysis of trading costs. It was completed in September 2010. The fund then outsourced FX management for its global equities and alternatives portfolios to RIS, which provides comprehensive records of transactions, including the precise time and date of trades. AustralianSuper has saved about $1.5 million by monitoring trading execution costs across its portfolios, Peter Curtis, senior investments manager, says. It “has discussions with managers which have fallen outside the range”, he says. “Tiers were put in place to review the spreads the custodian was charging,” he says. “So many people have their fingers in the pie, and this shows that there needs to be continual monitoring.” At UniSuper, Dharmendra Dayabhai, head of portfolio analysis and implementation, says costs are benchmarked against the volumes executed at 4 pm in London, when most global FX transactions usually occur. “We look at all managers and dissect currency trades, their volumes and their timing,” he says. “Some managers get lazy on the execution side. The constant message is that managers are subject to review. That in itself is a policing exercise. Prevention is better than cure.”