Beneficial owners at the IMN 20th Annual Beneficial Owners’ International Securities Lending Conference in Austin, Texas, agreed that 2013 securities lending returns were in the ballpark range of 2012, and 2014 is likely to be more of the same, which is in line with agent lenders’ expectations.
Generally, beneficial owners said that they received support within their firms for the activity, which the firms tend to view as somewhere between an alpha-generating mechanism and a back-office function. And while revenue does not seem like it will uptick much, beneficial owners seem to share agent lenders’ viewpoint that value is relative these days.
“If you look at it year over year you’re going to have a lot of noise in the numbers,” said Charles Rizzo, CFO, John Hancock Investments. “As part of our analytical process, we focus on portfolios with similar securities. That gives us a basis for collaborating with our agent lenders to drive better value for our fund shareholders.”
For generating more revenue, there is interest in new opportunities such as lending in emerging markets—one beneficial owner at a large public pension plan noted that the plan is looking into Malaysia this year—but no beneficial sensed any major shifts in this area yet. Beneficial owners also agreed that while general collateral is the norm, running a general collateral program is very difficult in the current yield environment. One fund went so far as to reduce the amount of general collateral they were managing cash on by 40% in 2013 as part of the fund’s de-risking process. With a steeper yield curve, beneficial owners agreed they would be likely to lend more, but there is not a sense that the opportunity set will change all that much in 2014.
And with new regulation on capital, agent lenders have wondered aloud whether they can still offer indemnification, or at what price, but the beneficial owners at the conference did not seem overly concerned with indemnification. “90-95% of the risk is just the reinvestment of collateral. It’s important to be able to show the board you’re doing it without risk, but I wonder about the value proposition [of indemnification],” said Brian Yeazel, managing director—fixed income, Mason Street Advisors.
Other panelists, both beneficial owners and agent lenders, agreed that while indemnification tends to be important to board members, the decision to forgo indemnification would be just like other investment decisions—simply weighing the risk/reward of an indemnified program with one set of splits and a program without indemnification with a different set of splits.
Agent lenders agreed that the risk of lending without indemnification is minimal, as securities lending is already collateralized and transacted with chosen counterparties. The concern over not having indemnification may be “psychological,” said one agent lender. “You may need a safety net if you’re 100 feet off the ground, but not if you’re two feet off.”
Beneficial Owners Expect Minimal Change, Even Without Indemnification
Beneficial owners at the IMN 20th Annual Beneficial Owners’ International Securities Lending Conference in Austin, Texas, agreed that 2013 securities lending returns were in the ballpark range of 2012, and 2014 is likely to be more of the same, which is in line with agent lenders’ expectations.