INVESTOR PERSPECTIVES
,W LV DOVR WKH ÀUVW VWHS LQ PDNLQJ \RXU FXUUHQF\ pricing more transparent and identifying the cost of EX\LQJ \RXU FXUUHQFLHV QRW DV HDV\ D IHDW DV LW ÀUVW seems.
“In 2004 when we looked at this area, the managers generally didn’t have any grasp on TCA, but I think the industry was shocked when CalPERs revealed the charges and how much they were paying their custodian,” says Michael DuCharme, head of foreign exchange business development at Russell Investments. “But it’s a gradual change, and I think that managers are becoming more aware of the issue and that TCA isn’t overly expensive. The fact is that you can’t manage what you don’t measure,” he adds.
For Jimmy McGeehan, the CEO at FX Transparency, a company specialising in currency TCA, it’s a mantra he keeps repeating to prospective clients. “TCA is the starting point for performance analytics on pricing,” he says.
But can straightforward daily currency trading by custodians hurt a fund’s bottom-line that much and how could it happen?
While all these horror stories are now common knowledge amongst investment managers and pension funds, consultant Russell Investments had warned the industry something was amiss back in 2004 with a report, “It’s time for more choice in FX.” It repeated the study again in 2008/2009 on the cost of transacting currencies. Both studies showed that prices clients received were skewed to inferior execution, resulting in unfavorable cost outcomes for the client.
“Overall both studies saw the average cost [the shortfall between the exchange rate and the midpoint daily price] was nine basis points, higher than the one to three basis points considered the industry average for developed market currencies,” reveals DuCharme.
1RZ ZKLOH LW UHPDLQV D FKDOOHQJH WR HTXLW\ PDQDJHUV WR think in basis points, these currency price discrepancies FDQ DSSHDU DOO RYHU WKH SRUWIROLR ´/RRNLQJ DW ÀJXUHV over time we’ve found that even the act of dividend repatriation which might run at between 3-10% of
Autumn 2011 | Currency Investor 29
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