Russell Investments: Fixed Income Trading Jason Lenzo Director; Equity, Fixed Income & FX Trading Brandon Rasmussen - Head of Fixed Income Trading EXECUTIVE SUMMARY Meeting our clients objectives has driven Russell Investments fixed income trading desk to execute across 106 countries, 33 different currencies, in 28 asset classes in 2017. As evidence by transaction cost analyses, Russell Investments pure agency execution outperformed competitors by leveraging 250+ dealers globally. Unique structure Russell Investments unique dual registration as a broker dealer and investment adviser has shown to benefit the clients at several levels. As a broker, we are able to access exclusive intradealer markets that can provide deeper liquidity and tighter spreads than the traditional dealer to client market, as well as having flexibility to transact in all manner requested by our clients, such as crossing or executing directly with other asset managers. As an investment adviser, we may be viewed by the street as a client. We receive full access to dealers inventories, market quotes, dealer interest, and all buyside to buyside trading platforms. Russell Investments operates in a pure agency capacity with no proprietary trading accounts. Russell Investments operates in a pure agency capacity with no proprietary trading accounts. Traditional B/D model Can use firm capital to execute or trade against client order flow B/D registered only, characterised by a lack of fiduciary oversight and care Limited to the liquidity present on their trading desk or in their ATS Economic difficulties have resulted in veteran departures and declines in overall experience Regional trading desks; coverage trader relies on counterparts in other offices Mixed execution results based on the inconsistent ability to find unique liquidity Pure agency, dual registration Act as pure agent without any ability to trade against client order flow Registered as both B/D and investment Adviser, with unrivalled level of client care Access to both buy and sell side venues as well as unique internal liquidity A veteran team of traders with an average of 14+ years of buy and sell side experience 24 hour trading coverage with a multi-asset team centrally located in one office Consistent execution outperformance relative to industry averages Broad business lines Because of the variety of services that we provide to clients, we have a broad array of order flow coming across our desks. Russell Investments does not follow a traditional asset manager approach, whereby a portfolio manager operates within a finite universe of securities. To address the need for versatility, Russell Investments trading desk is flexible and dynamic, while managing relevant risks for a wide variety of trading strategies. Meeting our clients objectives has driven Russell Investments fixed income trading desk to execute across 106 countries, 33 different currencies, in 28 asset classes in 2017. Russell Investments // Fixed Income Trading
Source: Russell Investments Fixed Income trading data. Blue areas represent countries in which Russell Investments executed fixed Income in 2017. Dealer line-up Traditionally, asset managers focus on a finite universe of execution venues to leverage access to primary issuance and research. Russell Investments Fixed Income dealer lineup does not have those constraints. Due to the large breadth of assets traded, Russell Investments deals with over 250 firms globally, ranging from large bulge bracket brokers and banks, small regional dealers, banks, hedge funds, and specialty firms. Our goal is to deal directly with the local, onground trading desks around the globe. Given the fact there is no consolidated limit order book or exchange in Fixed Income, the real market is determined by competitively bidding or offering to the appropriate dealers who are most likely to have interest in the securities based on domicile, currency, issue, sector, collateral, and size. Execution quality in Fixed Income is correlated to the gathering of market information; Russell Investments capitalises with 200+ dealers to achieve an improved visibility to asset pricing and liquidity. Our traders receive 3,000 to 5,000 e-mails a day on market colour, dealer inventories, runs, and axes that are then consolidated into a single database for quick and efficient access by sector, region, asset class, or specific security. Technology Russell Investments has a robust technology platform developed specifically to meet the needs of our broad global trading requirements. Our platforms incorporate the leading technology tools available in the marketplace and propriety applications. We leverage multiple execution technologies including Tradeweb, MarketAxess, Yieldbroker, Bloomberg, TrackMaster and LBA. Technologies employed have been highly customised and specialised for our own needs. Charles River and Bloomberg AIM: Trade order management systems used to manage execution processes and risk-management during implementation. TrackMaster: Proprietary software application providing real-time portfolio risk and execution view across multiple layers incorporating real time FX rates. This ability to synthesise data across multiple applications and venues in real time is unique in the industry and puts critical information in the hands of traders and portfolio managers to make immediate decisions affecting the performance of the portfolios. LBA: Proprietary software application designed to access markets in the most efficient manner by consolidating multiple platforms, order flow, market information, inventories, and live prices, while managing partial fills, average pricing, and regulatory reporting requirements. LBA aggregates best of breed asset class specific trading technology into a single cohesive execution platform and portfolio view. Why Russell Investments?
Active in all markets with intraday visibility to programme level data and prioritises exposure risks and execution quality over cheap trades based on yield alone Focus solely on best execution at both a total portfolio level and individual security level for our clients Provide clients access to ~250+ dealers globally across ~106 different countries and ~33 different currencies Acts only as agent on behalf of clients, and has no principal or proprietary book Transparency As an agency only provider, we believe strongly in providing transparency to our clients. As part of this transparency we provide the following post trade analysis: Bid Matix: A large database designed to collect market depth and dealer performance for every trade executed. A bid matrix report will show all quotes received by dealer by platform for every client trade. This report aggregates best to cover, best to average, number of dealers from which liquidity was sourced, and average number of quotes received. Transaction Cost Analysis (TCA): Sophisticated execution analysis can be provided to highlight both quantitative real-time performance versus prevailing market, along with qualitative peer universe comparison. Third-party TCA complements the Bid Matrix by providing additional depth and insight of the execution. MarketAxess compares the execution quality of investment managers trading US Investment Grade versus the TRACE universe. Exhibit 2 shows the percentages of trades executed at or better than the average daily TRACE prints for both Top 20 managers and Russell Investments. Exhibit 2: Percentage of trades executed better than TRACE for investment grade corporate by year YEAR RIIS TOP 20 AM 2012 86% 58% 2013 83% 59% 2014 84% 57% 2015 80% 56% 2016 78% 58% 2017 80% 59% Source: TRACE FINRA regulatory reporting system Exhibit 3: Compares execution improvement above TRACE by measuring the outcomes versus other asset managers during 2017. Source: TRACE FINRA regulatory reporting system
Exhibit 4: Russell Investments price improvement via percentile analysis for 2017 Only Client of 1400 for MarketAxess to show positive performance down through the 25th percentile Outperforming peers in all three categories of Volume Weight, Median, and Average Source: MarketAxess Execution Platform and Transaction Cost Analysis provider Exhibit 5: Russell Investments price improvement via percentile analysis for 2017 Overall: 4.79 bps of improvement versus Top 20 Asset Managers Consistent outperformance in all categories across the curve Average response per inquiry for Russell Investments 5.87 versus system average 5.65 Source: MarketAxess Execution Platform and Transaction Cost Analysis provider As corporate bonds trade with a larger bid ask spread than treasuries, they allow for more savings to be achieved, but even markets as liquid as Treasuries can see price improvement. Exhibit 5 indicates the price improvement Russell Investments received above the prevailing market at the time of execution. Exhibit 6: Percentage of spread savings on Treasuries executed in 2017 QUARTER MARKET RIS BOS% PEER BOS% DELTA BOS% Q1 TRSY 34% 26% 8% Q2 TRSY 27% 25% 2% Q3 TRSY 46% 28% 18% Q4 TRSY 47% 28% 19% Source: Tradeweb Execution Platform and Transaction Cost Analysis provider The Bid Offer Spread (BOS%) indicates where within the bid offer spread the trade was executed. These percentages represent a spread savings and are a good metric to compare how providers execute across multiple assets with varying Bid Offer Spreads. For example, if we sold bonds at the bid, we would have saved 0% of the BOS. If we sold at the mid, we would have saved 50% of the bid offer spread. If we sold at the offer, we would have saved 100% of the bid offer spread.
Exhibit 7: Percentage of spread savings on Treasuries executed in Q4 2017 Note 0-1.5 Year Note 1.5-3.5 Year Note 3.5-5.5 Year Note 5.5-10 Year Note >10 Year Strip 1.5-3.5 Year Strip 3.5-5.5 Year TIPS > 10 year 0% 20% 40% 60% 80% 100% 120% 140% 10Yr Equivalent Weighted % of BOS Source: Tradeweb Execution Platform and Transaction Cost Analysis provider, Blue = Peers; Grey = Russell Investments Russell Investments provides our clients with global trading coverage, broad depth of market, and leading-edge execution technology within an efficient transparent package. Our focus on multi-venue trading and execution quality with an unbiased approach has resulted in consistent outperformance versus our peers. Russell Investments places a tremendous amount of scrutiny on trade executions to ensure best execution is being achieved and that the overall outcome is in line with expectations FOR MORE INFORMATION: Call Russell Investments on +44 (0)207 024 6000 or visit russellinvestments.com For professional clients only This material does not constitute an offer or invitation to anyone in any jurisdiction to invest in any Russell Investments Investment services where such offer or invitation is not lawful, or in which the person making such offer or invitation is not qualified to do so, nor has it been prepared in connection with any such offer or invitation. Unless otherwise specified, Russell Investments is the source of all data. All information contained in this material is current at the time of issue and, to the best of our knowledge, accurate. Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Any past performance is not necessarily a guide to future performance. Issued by Russell Investments Implementation Services Limited. Company No. 3049880. Registered in England and Wales with registered office at: Rex House, 10 Regent Street, London SW1Y4PE. Telephone 020 7024 6000. Authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London E20 1JN. Russell Investments Limited (DIFC Representative Office) is regulated in the United Arab Emirates by the Dubai Financial Services Authority at: Office 4, Level 1, Gate Village Building 3, DIFC, PO Box 506591, Dubai UAE. Telephone+971 4 359 0322. Russell Investments Ireland Limited. Company No. 213659. Registered in Ireland with registered office at: 78 Sir John Rogerson s Quay, Dublin 2, Ireland. Authorised and regulated by the Central Bank of Ireland. KvK number 67296386. Russell Investments Implementation Services LLC. Is a subsidiary of Russell Investments Group, a Washington USA Corporation, and operates through subsidiaries worldwide, including Russell Investments Implementation Services Limited. 1995-2018 Russell Investments Group, LLC. All rights reserved. MCI-01534 EMEA- 1463 Issue: March 2018 Expires: 28 February 2019