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Pension Funds

Transaction costs make up nearly 25% of total investment costs — CEM Benchmarking

Transaction costs make up nearly a quarter of total investment costs borne by institutional investors, according to a study of global pension funds with £2 trillion ($2.6 trillion) in assets conducted by CEM Benchmarking.

The study showed that 49% of total costs were asset management fees. Performance fees were as nearly as high as transaction costs at 24%. Custody and operational costs, and overlay contracts constituted 3% and 1%, respectively.

Mike Heale, principal for Asia-Pacific at CEM, added that for a $50 billion investor $100 million in transaction costs is not insignificant.

According to the study, transaction costs averaged 20.2 basis points — almost half of investment management fees, at 41.8 basis points. CEM, a global benchmarking firm, found that among the 19 investors studied, reported transaction costs ranged from 15 to 26 basis points. Total average costs were 86.3 basis points, CEM said.

The analysis said investors, within overall transaction costs, were paying broker commissions, taxes, broker research, fixed-income and over-the-counter derivatives spreads, entry or exit fees, hedge fund fees and transaction costs for private investments.

Transaction costs for investors holding publicly listed companies was 6 basis points compared to fixed income at 21.9 basis points. Real estate investment costs were 6.9 basis points; private equity investments, 6.9 basis points; and infrastructure, 11.6 basis points. The most expensive asset classes were private equity at 48 basis points and hedge funds at 31.9 basis points.

Tej Dosanjh, director of Europe, the Middle East and Africa at CEM, said in a press briefing about the study that several factors should be considered when determining transaction costs, including asset mix, investment assumptions and what other funds are paying for a similar transaction. "However, volume and (trading frequency) can affect the transaction cost profile of an asset class," he said.

The study is available on CEM's website.