Texas Permanent saved at least $330,000 in trading costs because of the overlapping piece. It actually came out ahead on the total transaction by $760,000 in part because of the overlapping portfolios, and in part because the endowment sold high and bought low - leading to an overall savings of $22.1 million on the total transaction, according to a Plexus calculation of expected costs.
Ohio Police saved $274,000 in trading costs because of the overlapping portfolios, incurring $3.6 million in trading costs on the total $1.4 billion portfolio. Still, Ohio paid $2.9 million less in trading costs than what Plexus estimated the transaction could cost.
Plexus estimates that trades, on average, cost 47 cents per share, including brokerage commissions and market impact. Large-cap stocks typically cost slightly less than that to buy and sell.
Texas Permanent accepted a bid from the broker to pay 5.8 cents per share in commissions and market impact, but actually came out ahead in the restructuring of its entire portfolio. Plexus had estimated Texas could incur trading costs of 12.1 cents per share.
Ohio Police & Fire accepted a bid of 4.3 cents per share, but paid 7.5 cents per share in trading costs. Plexus had estimated Ohio could pay as much as 13.9 cents per share.
(Plexus used those estimates of 12.1 cents per share and 13.9 cents per share to arrive at the amount each fund saved.)
"Together, they achieved better pricing than they would have on their own," noted Alan Rubenfeld, director in the global portfolio trading group of Deutsche Bank Securities.
Holland Timmins, acting executive administrator of the $18 billion Texas Permanent endowment, concurred. "This trade was clearly a home run," he said. "I don't think it's a once-in-a-lifetime opportunity, but I don't think it will be real common because there are a number of pieces that need to fall into place."
William J. Estabrook, executive director at the $7.7 billion Ohio Police & Fire fund, added: "We would do it again if the opportunity presented itself."
As part of its portfolio restructuring, Texas Permanent combined its $2.4 billion active domestic large-cap equity portfolios into an internally managed passive S&P 500 portfolio, terminating large-cap equity managers Capital Guardian Trust Co., Dresdner RCM Global Investors, Harbor Capital Management and Northern Trust Global Investments.
Additionally, the endowment shifted $800 million from an internally managed core fixed-income portfolio to the internally managed S&P 500 index portfolio, raising it to $6.4 billion, Mr. Timmins said. All but $400 million of that shift was bundled together and traded through Deutsche Bank; the fund bought the remaining $400 million in a separate transaction, not through Deutsche Bank.
In other words, Texas Permanent sold $2.4 billion of large-cap stocks (including $228 million in the "natural trade" that Ohio Police & Fire bought), and bought $2.9 billion of the S&P 500 index through Deutsche Bank, trading a total of approximately $5.3 billion.