Transaction Cost Analysis RFQ Final Board Presentation

Transcription

1 Joint Meeting of the Retirement Boards Meeting Date: 4/24/2018 Transaction Cost Analysis RFQ Final Board Presentation for City of Fresno Retirement System April 24, 2018

2 Agenda Tab A: Introduction to Zeno AN Consulting - History of Abel Noser and Zeno Consulting Group - Zeno AN Consulting after the merger Tab B: Transaction Cost Primer: What are they, and why Asset Owners should care Tab C: Zeno AN Consulting - Onboarding and Oversight Process - Onboarding and Oversight-Process Timeline - The value of meaningful TCA oversight Tab D: Zeno AN Consulting - TCA Service Proposal Options - Option 1 - Option 2 2

3 Who is Zeno AN Consulting? Zeno AN Consulting is a consulting firm, not a broker, that specializes in helping large institutional asset owners proactively monitor, and manage, their asset managers and other trading partners processes. All analytical thought is a function of math, logic, and ethics but math and logic must be subordinate to ethics. Zeno of Citium c.335-c.263 B.C. (paraphrased) As prudent fiduciaries, more than ever before, asset owners should understand their managers trading process, what they pay to execute trades, whether they obtained best execution, and its impact on performance. The easiest route to the top quartile of performance is to be in the bottom quartile of expenses. Jack Bogle 3

4 Zeno AN Consulting: A Historical Legacy of Trade Oversight Abel Noser Solutions: - Founded in 1977 by Stanley Abel and Gene Noser; Abel Noser was the first firm to launch a commercially available TCA service. - Abel Noser Solutions, an independent technology company, was created in 2007 to strengthen the product and avoid any perceived conflict of interest - In 2011, Abel Noser Solutions releases their industry leading Trade Zoom web-platform to the institutional marketplace; and by 2012, Abel Noser Solutions attained #1 market share rank in TCA (Greenwich Assoc.) - Following 40 years of unparalleled success in providing transparency to the trading markets, Stanley Abel and Gene Noser enter into a management-led buyout with investment from Estancia Capital, thus resulting in: ANS transitioning to second generation management in In 2017, Greenwich Assoc s study of 270 buy-side traders, Abel Noser was one of only two TCA providers identified by name as Pioneers in the TCA industry. The other TCA provider listed by name was Zeno. Zeno Consulting Group LLC - Originally known as Plexus Group, was established in 1986 as a privately-owned TCA consulting firm under the leadership of Wayne Wagner and Larry Cuneo. - Plexus was acquired in 2002 by JPMorgan and run as a wholly-owned subsidiary within JPMorgan s Treasury division. - In January 2006, Plexus was spun off to ITG and the plan sponsor business was separated from the business which catered to buy-side firms, and incorporated as Plexus Plan Sponsor Group, Inc.. - In January 2010, ITG spun off Plexus Plan Sponsor Group into an independent employee-owned company, subsequently renamed Zeno Consulting Group, LLC ( Zeno ). - In 2017, Greenwich Assoc. s study of 270 buy-side traders, Zeno was one of only two TCA providers identified by name as Pioneers in the TCA industry. The other TCA provider identified by name was Abel Noser. In this capacity, Zeno AN Consulting has been assisting asset owners in monitoring and evaluating their external investment managers trading and portfolio-transition performance for 30 years. This oversight has helped 100s of Asset Owners meet their fiduciary oversight duties and reduce excessive trading costs. 4

5 Zeno AN Consulting: The largest TCA Provider Dedicated Solely to Asset Owners Our merger provides the most comprehensive suite of TCA products available exclusively to asset owners and takes trade cost management to the next level. In this regard, Zeno AN Consulting: - Services over 250 institutional Asset Owner Clients (including 15 California public funds). This enables unparalleled Peer Group comparisons! - Multi-Asset Class TCA includes: Equity, Fixed Income, Foreign Exchange, Futures, and Derivatives. - Stock-specific Peer Group Trade Universe: comprised of over $7.2 trillion in principal traded annually, and ranks each managers trading performance based on the characteristics of the specific securities they traded. - Investment-Mandate Peer Group Universe: comprised of over 2,000 global investment managers, and ranks the trading performance of your managers vs. other managers with the same Investment Mandate (ala investment performance)! - Industry Leading web-based drill-down and technology platform, TradeZoom. - Independent conflict-free advice and consulting, as a Registered Investment Advisor under the Investment Advisors Act of Currently 12 employees dedicated to servicing just Asset Owner clients, with over 242 years of Industry Experience! The next largest TCA provider has six employees (who service both managers and Asset Owners). - Industry thought leader (articles, white-papers, speakers at industry conferences etc) on trade-related topics, and the implications those topics have for Asset Owners. 5

6 Transaction Cost Primer What are trading costs, and why should Asset Owners care? 6

7 What are trading costs? Trade cost analysis should reflect the needs of the Asset Owner. If there s a reason for asset owners to monitor trading costs (other than as a legal CYA), its to understand the impact those costs have on the returns of their Funds. Common Sense Definition for Trading Costs : The loss of asset value, incurred by your Fund, as a result of a manager building or unwinding a position in their portfolio. Whether it takes 1, 3, or 10 days for a manager to sell a certain number of shares, if the shares were selling for $X when trading began, and the manager ultimately sold all the shares at an average price of $Y per share, then the Fund paid $X-Y. This is called Implementation Shortfall. Defining costs as Implementation Shortfall on the total decision size, is consistent with how we calculate overall Fund performance, and helps Fund fiduciaries better understand the true impact trading has on their Fund. 7

8 Equity Trading Costs: An Inconvenient Truth Some equity managers trade costs are dramatically worse than their peers. Why is that? Zeno Total Trading Costs (one way)* Small Cap Growth Large Cap Growth International Emerging Markets 25th Percentile (Least Expensive) 50th Percentile (Median) 75th Percentile (Most Expensive) -37 bps -19 bps -22 bps -18 bps -62 bps -48 bps -42 bps -44 bps -118 bps -72 bps -77 bps -81 bps Difference Between 25th and 75th Percentile Round Trip Trading Costs 162 bps 106 bps 110 bps 126 bps * Zeno Consulting Group Total Cost Ranking Universes as of 4Q17 8

9 Unique Characteristics of Bond Market = Risk to you! Unlike Equities, the Bond market is a dealer-driven market, with limited transparency. While there are many more Bonds than Stocks, the overall Bond market is much less liquid with some securities not trading for weeks or months. The top 20% of bonds currently account for over 90% of all fixed income trading! Someone owns the other 80%. What happens when those bonds need to be traded? 18% Concentration of Trading Activity by Liquidity 16% Percent of Total TRACE Volume Traded 14% 12% 10% 8% 6% 4% 2% 0% Liquidity Percentile (100=Most Liquid) H Percent of Market Volume H Percent of Market Volume 9

10 A seminal study in 2011 calculated the cost of trading Investment Grade bonds in an Implementation Shortfall context (i.e. loss of asset value incurred by the fund).* Trade Size Under $100K $100K - $1 M $1M - $5 M $5+ M Average Trade Costs -78 bp -46 bp -21 bp -19 bp The above costs are one-way therefore double these numbers to calculate the full roundtrip impact on Fund performance. Trading costs for High Yield, Emerging Markets etc. would be even higher! * Hendershott and Madhavan, Click or Call? Auction verses Search in the Over-the-Counter Market, October 2011.

11 Sep 29-Sep 28-Sep 25-Sep 24-Sep 23-Sep 22-Sep 21-Sep 18-Sep 17-Sep 16-Sep 15-Sep 14-Sep 11-Sep 10-Sep 09-Sep 08-Sep 07-Sep 04-Sep 03-Sep 02-Sep 01-Sep 31-Aug 28-Aug 27-Aug 26-Aug 25-Aug 24-Aug 21-Aug 20-Aug 19-Aug 18-Aug 17-Aug 14-Aug 13-Aug 12-Aug 11-Aug 10-Aug 07-Aug 06-Aug 05-Aug 04-Aug 03-Aug 31-Jul 30-Jul 29-Jul 28-Jul 27-Jul 24-Jul 23-Jul 22-Jul 21-Jul 20-Jul 17-Jul 16-Jul 15-Jul 14-Jul 13-Jul 10-Jul 09-Jul 08-Jul 07-Jul 06-Jul 03-Jul 02-Jul 01-Jul Pips FX Trading Costs: Interests are inherently adverse! What s Wrong With This Picture? EUR.USD - Trades against High and Low of Day Offset from Median Price - Buys in Blue, Sells in Red Sell-Max Sell-Min Sell-Median Buy-Max Buy-Min Buy-Median All-99th Percentile All-1st Percentile Source: Zeno client s 3Q10 analysis, powered by FXAll 11

12 Zeno AN Consulting Onboarding and Oversight Process 12

13 Zeno AN Consulting: On-boarding and Oversight Process Trade Data Data Processing Client Execution Results Production of Client Reports Consultation with Client Due-diligence and Fiduciary follow-up Client authorizes Custodian to provide trade data to Zeno AN Zeno AN production team reviews the file and processes the trade data Client commissions and execution prices are compared to our tick level global market data Zeno AN client services team verifies results for accuracy Appropriate benchmark metrics are selected. Execution costs and Commissions are measured against our $7.2 trillion Stock-specific Peer Universe. Execution costs, Commissions, Use of Brokers, and Turnover are ranked against our Investment Mandate Peer Universe. Review of costs and turnover rates enable us to calculate the portion of annual returns eroded by trading. A percentile ranking for each metric is computed. Execution costs of client s managers are compared to over 2000 Peer Groups trading like strategies with similar disciplines A trend analysis is conducted to identify trading patterns and negative trends Graphs chart the speed with which managers work their orders and whether their strategy helped/hurt trading efficiency. Custom reports are generated on industry-leading web based TradeZoom Zeno AN will meet with the client to interpret the data, explain findings, and recommend a course of action. Top-down approach maximizes staff time reviewing: aggregate Fund costs, which managers are driving those costs, and other compliance related issues. Certain TCA Reports flag issues that warrant follow-up, and suggest specific questions to be presented to managers. If requested Zeno An will engage managers to discuss our methodology and analysis upon request. Questions may be qualitative or quantitative in nature. Depending on the quantitative TCA analysis generated, questions may focus on such matters as: the general resources used to trade portfolios; trading policies and practices; is AUM causing capacity issues; the impact on performance caused by trading; and are clientspecific programs working as intended. 13

14 The Value of Meaningful TCA Oversight Zeno AN Consulting s TCA oversight process is designed to help plan fiduciaries assess overall execution quality and identify where, when and how portfolio managers, traders and brokers execute trades. In this respect, it is a measurement of trading efficiencies in multi-asset global markets. Two types of issues can be flagged in Zeno AN Consulting s reports: Compliance/Fiduciary due-diligence related issues. Issues that when addressed appropriately can result in Trade Cost savings. Four primary benefits that Asset Owners enjoy through Zeno AN Consulting s TCA oversight: 1. Satisfy your Fiduciary/Compliance obligations with respect to ongoing trade cost and commission monitoring (for equity, fixed income and foreign exchange trades). 2. Enjoy greater insight into your managers internal trading procedures and practices (i.e. this type of due-diligence helps you better understand what your managers do with your Fund assets). 3. Once your managers realize you are monitoring their trading practices and commissions in a meaningful way, they tend to pay more attention themselves, particularly with respect to your account. As a general rule, this results in improved trading performance and savings for your Fund (Business School 101 Hawthorn Effect ). 4. To the extent specific issues are flagged in the TCA analysis, this enables more focused discussions on those items. As a result, improvements are often seen over time, in those areas as well. 14

15 Zeno AN Consulting Proposals to City of Fresno Retirement System Two TCA service options to chose from. Both options delivered via pdf, and TradeZoom (web-based platform). Both options are annual services (with quarterly reporting). Both options cover Equity, Fixed Income, and FX trading (if desired). The two service options differ only in the granularity of quantitative analysis subscribed to, and the associated due-diligence insights and fiduciary follow-up enabled by such data. 15

16 City of Fresno Retirement System: TCA Option 1 Scope of Service: Summary and Manager Detail Reporting via Trade-Zoom Web: Includes: Over 150 metrics (custom metrics available upon request) Drill down capabilities by: Manager, Broker, Stock, Sector, and Trade Date Annual Fee $25,000 16

17 City of Fresno Retirement System: TCA Option 2 Scope of Service: Provides: greater insights into the causes of high manager/broker costs; and the ability to engage managers in constructive dialogue. Graphs manager trading styles, speed, and the impact on costs. Quantified the impact costs have on returns, and flags specific issues warranting follow-up. Annual Fee $30,000 for first 14 portfolios reviewed, and $1,500 for each additional portfolio above

18 City of Fresno Retirement System: TCA Option 2 18

19 For further information please contact: Mary Davidson SVP, Sales & Client Services Brian Greene SVP, Sales & Client Services

20 The information contained herein has been taken from trade and statistical services and other sources we deem reliable but we do not represent that such information is accurate or complete and it should not be relied upon as such. No guarantee or warranty is made as to the reasonableness of the assumptions or the accuracy of the models or market data used by Zeno Consulting Group, LLC (Zeno) or the actual results that may be achieved. The screen shots provided in this presentation represent hypothetical examples of certain products available from Zeno. They contain sample data and are provided for informational purposes only. None of these materials is intended to be used for trading or investment purposes or as an offer to sell or the solicitation of an offer to buy any security or financial product. These materials do not provide any form of advice (investment, tax or legal). All trademarks, service marks, and trade names not owned by Zeno are owned by their respective owners. All functionality described herein is subject to change without notice. These materials are not to be copied, displayed or transmitted in any form without the prior written permission of Zeno. 20