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ITEM PF15 - ANNEX 2

PENSION FUND COMMITTEE – 25 FEBRUARY 2005

MONITORING TRANSACTION COSTS

Commissions, Fees and Taxes

Commission costs are negotiated with the brokers by the investment manager and a typical range for agency trades in the UK would be from 10 basis points to 25 basis points. Trades in other countries, which require special attention charge higher commissions. These may be as high as 50 basis points for some emerging markets.

Fees may be levied by a country’s exchange and in some countries there are additional government mandated charges or taxes (e.g. UK stamp duty of 50 basis points).

Timing Costs

Timing costs are the costs that occur as the price moves between the time that the fund manager generates the order and the time the order is placed in the market by the dealer.

For example: A portfolio manager passes a buy trade in mmO2 plc to his dealing desk at 10am and the market price at 10am is 119p to 119.25p. By the time the dealer has the trade ready to go to the market, i.e. he has completed any administrative tasks relevant to the trade and checked indications of interest etc. the price is 119.50p to 119.75p. At 10am he could have brought, say, 1 million shares at 119.25p; by the time he has placed the order he will only be able to buy these shares at 119.75p so the timing cost is 0.5p per share. The total timing cost on this trade is £5,000.

Market Impact

Market impact is the price movement that occurs in a stock due to an order being in the market. Market impact can be calculated by comparing the executed price of the trade in the stock to a benchmark such as volume weighted average price (VWAP) or average price, for the time the order was in the market or on the day of the trade.

Using the mmO2 plc example: From the time the trade was placed with the broker to the end of the day when the trade was completed the VWAP was 119.65p. The dealer executed the trade at a price of 119.60p. So the market impact cost was –0.05p per share, i.e. the trade was executed at a price better than the market average, so saving £500.

Opportunity Cost

Opportunity cost is the loss or gain that occurs in the price of a stock as a result of a delay in completion of, or an inability to complete in full, a trade after an investment manager’s decision to buy or sell a stock.

Opportunity costs are incurred as a result of investment decisions and trading decisions. They are analysed by the investment manager and are part of the investment style or trading style of the investment manager.

Looking at the mmO2 plc example: - The fund manager decides to limit the trade at 119.60p and the trader is only able to buy 500,000 shares on the first day at this price. On the next day the stock trades above this level at 119.80p. The opportunity cost over this period is 0.20p per share. Making for an opportunity cost of £2,000. Opportunity cost is normally assessed against a longer time period than the following day, say, a week or more later.

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