Lower Transaction Costs Not Necessarily Good for Funds

Article excerpt

Watson Wyatt has warned that pension funds do not necessarily benefit by driving their transaction costs down. Nick Watts, European partner at Watson Wyatt, says: 'We should be very wary about saying that lower transaction costs are always better for pension funds. The focus must be on net performance of managers.

'Lower transaction costs do not always generate higher returns for pension funds and higher costs can be translated into an improved bottom line.'

A draft code proposing dramatically increased levels of disclosure on costs incurred by investment managers on behalf of pension fund clients is being prepared by the Investment Management Association (IMA) for publication later this month.

Analysis by Plexus, the performance measurement firm, suggested that in the fourth quarter of 2001 global costs were more than 175 basis points, principally relating to the impact of trades on market prices. The IMA code, in the wake of last year's Myners Report, will increase pressure on fund managers to lower their costs.

In order to secure a decent weighting in a liquid company a manager can be forced to incur high initial transaction costs, Watts says. He adds: 'Some managers may feel that it is in the best interest of their clients to pay higher transaction costs in certain situations. Managers need to take responsibility for explaining costs. …