Increased trading, brokerage, and market impact costs are driving this focus and encouraging super funds to implement total cost analysis measures to bolster member returns.
There is no doubting the significance of transaction costs in long-term results for investors of all sizes. For every $1 billion invested in an active equity portfolio, for example, investors can expect to pay between $1 million and $1.5 million per annum in transaction costs (10 to 15 basis points).
The costs may also escalate significantly above that level due to inefficiencies and various other factors that can drive higher expenses or losses. On a consistent basis, and compounded over time, good practice in this area will make a tangible difference to overall value.
Transaction cost analysis modelling provides an investor with detailed insights into all of the costs incurred when trading, including both visible expenses and market impact expenses, to reflect the difference between the price at the time a trade was instructed and the price achieved.
The three hallmarks of a high-quality transaction cost analysis model are its ability to cover both explicit and implicit costs, cover a diverse range of metrics, and provide contextual insights on aspects such as market conditions and specific geographic regions.
By identifying these investment impacts, super funds are able to better see the bigger picture when it comes to their investment returns. As member returns and fees remain in the spotlight, more super funds are also outsourcing their transaction cost analysis modelling to tap into independent expertise that can help minimise fee leakage.
This can be achieved through measures such as optimising trading strategies and renegotiating investment manager fees. By doing so, super funds are able to fulfil their fiduciary duties, ensure greater regulatory compliance with the Australian Prudential Regulation Authority (APRA), enhance cost transparency, identify areas for improvement, and ultimately deliver better outcomes for their members.
Implementing a holistic transaction cost analysis can create an opportunity for fee negotiation at a fairer market value. This process also creates a “feedback loop” which allows for continuous improvement by making necessary adjustments over time to drive cost efficiencies in both the short and long term.
Mitigating the issue of fee transparency and disclosure
In July 2023, bfinance independently surveyed nearly 200 senior institutional investors globally, through a snap poll on their experiences with fees. In the study, fewer than half indicated that they were satisfied with the “transparency” of trading/brokerage costs, while just 23 per cent said they were satisfied with comparability (the ability to benchmark that cost).
Interestingly, 21 per cent of senior institutional investors indicated they “don’t know” whether their costs are transparent, illustrating an ongoing lack of awareness.
This data further showcased the issue of fee transparency and disclosure across key global markets, a trend that we are continuing to see rise in Australia and particularly among superannuation funds.
Additionally, when super funds look to transaction cost analysis, they must stay alert to the potential risk for unintended consequences. Once a cost becomes visible and has to be disclosed, there emerges an incentive to minimise that cost, or at least the visible aspect of that cost, especially if they believe that the disclosed number may impact decision making.
Overall, transaction cost analysis modelling is increasingly becoming more widely adopted amongst Australian super funds, a trend we expect to continue, as issues around fee transparency and disclosure remain prominent. This makes it fundamental for super funds to better analyse their total transaction fees to ensure that they are providing better member returns over both the short and long-term future.
Frithjof van Zyp, senior director, bfinance
Yes of course fees and transaction costs matter per the above commentary. The bigger shame is the massive net returns delta left off the opportunity set because Super can’t/doesn’t want to pay success fees, etc. That is not in the members’ best interest for reasonably similar risk-return strategies.