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Laxman Pai, Opalesque Asia: Transaction costs account for 24% of total investment costs for the world's biggest asset owners, according to a study of institutional investors.
According to a study of global pension funds with $2.6 trillion in assets conducted by Toronto-based CEM Benchmarking, 49% of total costs were asset management fees.
The report quoted John Simmonds, CEM Benchmarking's UK Principal, as saying: "Transaction costs make up a significant part of the investment costs incurred by institutional asset owners. Our study shows that, on average, transaction costs account for 24% of total investment costs."
Custody and operational costs, and overlay contracts constituted 3% and 1%, respectively.
The study said that transaction costs can be 'explicit' or 'implicit'. Explicit costs are generally easy for funds to identify, e.g., brokerage commission, where the price is contractually determined and an invoice raised. Implicit costs are harder to identify and embedded in the cost of buying and selling securities, e.g., bid-ask spreads and mark-ups on over-the-counter (OTC) instruments.
The asset owners, which include pension funds and sovereign wealth funds, paid an average 86.3 basis points for investments, of which 20.2bps on average went to transaction costs. This was around the same level as performance fees and about half that of base manager fees or internal management costs, CEM Benchmarking said.
"The funds in the study said they have t...................... To view our full article Click here
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