FTfm Supplement, March 18th, 2002, page 1.

Managers fail to monitor costs

Mercer survey shows leading investment houses do not track transaction charges

Some of the world's top investment houses do not keep track of the costs of buying and selling shares for their UK pension fund clients, according to a survey by William M Mercer to be published today.

In a survey of 29 fund managers, controlling more than £500 bn of assets, Mercer found that 13 did not measure how much of their pension fund clients' money they spend when trading on the stock market.

The findings raise questions about whether fund managers are offering best value for money when incurring so called transaction costs. These brokerage charges, recently estimated to be as high as £8 bn a year, are ultimately paid by pension funds.

The findings also throw into doubt the feasibility of a draft industry-wide disclosure code for the UK, unveiled last week by Lindsay Tomlinson, Chairman of the Investment Management Association, the UK-based fund managers' trade body, at the National Association of Pension Funds' conference in Edinburgh.

The code, if approved, would oblige fund managers to provide pension funds with a complete breakdown of costs, including fund management fees, stamp duty and trading fees.

The disclosure guidelines represent the industry's main response to the government's call for fund managers to control costs. The amount of pensioners' savings being absorbed by fees is causing increasing concern following the fall in stock markets, and the prospect of lower returns.

In the government's code of best investment practice - based on the recommendations of Paul Myners, former chairman of Gartmore, the US-owned fund manager - pension fund trustees and their managers "should have a full understanding of the transaction-related costs they incur".

If, by March 2003, they do not have a full understanding - as the code demands - then they will face the threat of legislative action.

Piers Berlin, the report's author, said: "It was surprising to find that some of the large fund managers did not monitor their transaction costs. It's difficult to justify not measuring them."

He added that, traditionally, transaction costs were an area "where fund managers said 'I know best'".

But the Mercer survey showed that some of the best-known fund managers "may not have a good grasp of the full transaction costs".

Only 13 of those surveyed hired specialists to monitor the costs of trading: eight used Plexus, a US company; four used Elkins/McSherry, a subsidiary of State Street, the US bank; one used Global Securities Consulting Services, a UK firm. Three others used in-house monitoring units.

HSBC the UK bank which launched its own measuring service last month, said that transaction costs vary widely from manager to manager. The bank said that fund managers ranked in the top quartile for their ability to keep a lid on costs incur charges of, on average, 19.1 basis points on each transaction. Those who are in the bottom quartile incur charges of 56.4 basis points. Even for a fund with as little as £100 m of equities, the difference equates to about £500,000 a year.

Mr Berlin did find that that some fund managers were making an effort to minimise costs, even if they were not monitoring themn. He said there had been an increase use of crossing networks, such as E-Crossnet.

The crossing networks match buyers and sellers of shares - and charge a fraction of the amount demanded by mainstream brokers. In the Mercer survey more than two-thirds used the services of the crossing networks.

Mercer, which advises pension funds on the best fund managers to run their money, is now calling on its clients to use a transaction cost specialist.