Average commission spending by institutional investors in Europe has fallen 15%, from $7.8 million in 2001 to an anticipated $6.6 million this year, or so says a spring 2002 research study by Greenwich Associates.
“Facing major reductions in both their assets under management and their investment returns, European institutions, like their U.S. counterparts, are making every move they can to improve their performance – particularly by cutting trading costs,” Greenwich Associates consultant John Colon says.
Greenwich Associates research reveals a high and rising number of institutions are trying to accomplish this by increasing their portfolio and electronic trading:
* Where 75% of European asset managers were using portfolio trading for their European equity business two years ago, 83% are doing so in 2002 – and the proportion of all institutions’ commission business done in portfolio trading has risen from 14% to 19%.
* The real return to brokers on most portfolio business is far less than the average commission of 21 basis points paid for individual European stock trades, notes consultant John Feng: “The average reported on portfolio trades is 8-10 basis points, but a lot of brokers say that, in practice, they are obliged by institutional and competitive pressures to do the trades for much less, and to try to make some money on the other side.”
* Real returns to brokers are also much lower on electronic than on normal agency business. Here, too, many European asset managers are stepping up their usage of a cost-cutting trading technique. The proportion of European institutions trading European stocks electronically has risen from 42% to 59% over the past two years, and the proportion of total institutional volume done this way has more than doubled – from 3% to 7%.
As if these buy-side efforts to cut costs were not worry enough for the sell-side, asset managers are also adding pressure on brokers by reducing their lists. For European research, the typical European institution has cut back from 14.5 brokers in 2001 to 13.1 this year, with the largest organizations – those with over €10 billion in assets – ratcheting back from 17.4 to 15.9.
Broker responses: cutting staff – and service
Major brokerage firms have built their cost structure on the expectation of significantly greater activity than has been seen in the primary as well as the secondary markets. With the slowdown in IPOs aggravating the effects of institutional efforts to cut trading costs, brokerage executives are talking of cutting their cost base in Europe by as much as 20%.
From recent discussions Greenwich Associates consultants have had in Europe, it is clear brokers are taking tough decisions both inside and outside their own offices.
“On the inside, they are taking steps to reduce staffing levels in general, in the size of their research teams, in the extent to which they provide specialist sales coverage, and about such costs as flying analysts from market to market to offer direct access,” John Colon notes. “On the outside, brokers are scrutinizing the returns they obtain from each market they cover and from each institution they cover – carrying out rigorous profitability analysis on a client-by-client basis.”
Compensation: Brits doing best
Among European institutional investors using European stocks, portfolio management professionals in the United Kingdom are averaging twice as much salary as their Continental counterparts – and four or five times as much in bonus. U.K. traders in these markets are averaging 40% more salary than their cousins on the Continent – and three times the bonus.
U.K. portfolio professionals specializing in European investments averaged total compensation of €367,000 – 120% higher than in Switzerland, 150-200% higher than in Italy, Germany, and the Benelux countries, and 300% higher than in Spain.
Large bonus payments in Britain – averaging €173,000, some 90% of salaries – account for a very large part of these differentials, though U.K. salaries, averaging €194,000, are also nearly double the average €98,000 paid in most other European markets.
Greenwich Associates conducted in-person interviews with 1,511 equity investors about market trends, compensation, and their broker relationships. Interviews were conducted in Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, the Netherlands, Norway, Spain, Sweden, Switzerland, and the United Kingdom between February and April, 2002. Investors interviewed specialized in one or more of the following share types: Pan-European, British, German, French, Swiss, Spanish, Italian, American, Asian, Japanese, Australian, Latin American, emerging EMEA and South African shares.