HSBC has added its weight to the horde of banks and consultants looking to measure the transaction costs incurred by institutional investors. By combing through 700,000 UK equity transactions seen by its Global Investor Services (GIS) custody arm, HSBC has estimated that average transaction costs (including market impact as well as commissions) of 36.6 basis points per transaction added up to nearly 500 million. Faced with factoids of this kind, institutional investors who chose to ignore the transaction costs charged to their assets by fund managers and broker-dealers in the bull market will find a bear market increases their interest in cutting them.
The 500 million figure emerged from the first annual review of transaction costs incurred by institutional investors trading in UK equities in 2001. The review also revealed a big difference -19.1 basis points against 56.5 basis points – between the lowest and highest charges levied by broker-dealers and fund managers. More than 700,000 transactions worth over 125 billion were examined. Overall transaction costs, including commissions and market impact, averaged some 36.6 basis points on each transaction, representing a total of almost 500 million. Clients then also faced stamp duty on all purchases, worth an estimated additional 250 million.
“Our “review highlights the financial importance of transaction costs to our clients, especially UK pension funds,”” said Steve Crockford, Head of GIS. “”In many cases, pension fund performance is more affected by these costs than by the level of fees for he investment managers, but, traditionally, transaction costs have received much less attention. The Myners Report is changing this and HSBC’s transaction cost measurement service, TCMS, launched just a month ago, is already helping our clients to monitor and reduce these costs.”
The estimated average costs of 36.6 basis points represents the mean performance across all transactions. A broad range of performance was revealed by the survey, suggesting that not all managers and brokers incur the same level of transaction costs. Top quartile performance in this area suggested average transaction costs of 19.1 basis points or less based on the review, while fourth quartile performance involved costs that exceeded 56.4 basis points. Even for a pension fund with as little as 100 million of equities and normal turnover, the difference represents a potential extra cost of nearly 500,000 a year. “Making sure you know which brokers are being used most by your managers, and their relative execution performance, is something that no pension fund should ignore in the future”,” concludes Crockford.
HSBC has worked on transaction cost measurement products with GSCS, the consultancy run by Robert Kay. Others in the transaction cost measurement field include Plexus, Abel Noser, Omgeo and Inalytics Limited, a company run by former fund manager Rick di Mascio.