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Review could put managers on notice

Jonathan Parker thinks higher-fee managers might have to explain their costs.

Consultants working with the first U.K. defined contribution plan sponsors due to report transaction costs in November say their clients already are reviewing allocations in their portfolios.

First to come under review would be managers of similar strategies, for example global equities, where it will be easy for plan executives to do a side-by-side comparison of the managers' transaction costs. According to consultants, clients aren't yet explicitly planning to cut down on the number of managers or the number of funds offered within an asset class, but they are assessing which similar funds have higher costs.

Jonathan Parker, partner at Redington in London, said plan sponsors then will be able to tell which funds stand out. "If out of 20 funds (in the same sector), 18 have transaction costs between 10 and 20 basis points but two of them have between 60 and 80 basis points, the client will talk to the manager about why these costs are higher."

David Porter, head of investment delivery for Europe, the Middle East and Africa at AllianceBernstein (AB) LP (AB) in London, said funds that feature high-turnover portfolios — such as some multiasset portfolios known in the U.K. as diversified growth funds — but don't produce the expected return, might also be reconsidered by clients because the new methodology will highlight the cost of trading for these funds.

However, some sources said the impact of the new transaction-cost reporting on strategic asset allocation will not be seen immediately.

Alistair Byrne, head of Europe, the Middle East and Africa pensions and retirement strategy at State Street Global Advisors in London, said: "Clients largely (have) made a decision (that they) want to be spending additional investment budget on active funds or, say, emerging market equity, where execution costs might be higher, and the transaction costs information won't change their strategy."