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 $2.6trn in assets conducted by Toronto-based CEM Benchmarking, 49% of total costs were asset management fees.
“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,” John Simmonds, CEM Benchmarking’s UK Principal said in the report.
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 the ability to include transaction cost limits as part of the manager selection process, but they told us they were more likely to enforce a turnover limit rather than impose a transaction cost limit,” said the report.
Costs captured in the analysis come from the following: broker commissions, taxes, broker research, fixed income and over-the-counter derivative spreads, entry/exit fees, transaction costs for private investments, and costs within hedge funds.
Pension and sovereign wealth funds are tempted by private assets as they hunt for better returns after a decade of persistently low interest rates.
“Transaction costs are a material component of [overall] costs but are tough to collect consistently,” CEM said.
Regulators around the world are looking at ways to make it easier for investors to understand the total cost of investing amid a push for greater transparency on costs.
The Mifid II trading rules, which came into force across Europe at the beginning of the year, will significantly change the way costs and charges are disclosed to investors, affecting all who provide investment services.