Neil Henze, Chief Trader, Michael Clements, Chief Trader and Rob Newhall, Equity Trader, at ERS discuss their technology, commission spend, and development of trading.
Neil Henze: Employees Retirement System of Texas’ (ERS) defined benefit plan currently has assets under management of approximately $26.5 billion. ERS’ history of managing our own assets internally goes back at least 17 years. The difference today is that over the last 10 years we have increased the percentage of assets managed internally to approximately 63%.
Why did we do it? Internal management is less expensive at an average of just 10 basis points to manage funds internally because we have an impressive team of equity and fixed income portfolio managers, analysts and traders. This team has considerable experience generating competitive risk adjusted performance at a reasonable cost.
Our primary rationale for using external managers is attributed to the fact that we do not currently have the capability to manage certain alpha generating assets, but we are constantly learning. In addition, it goes without saying that a lot of our success is attributed to our Board and Investment Advisory Committee, which are very engaged and proactive.
Learning the manager’s role
Neil Henze: We trade for both our internal portfolios and most of our external advisors’ portfolios, and this makes ERS unique. ERS trading for external advisors promotes better transparency into the advisor’s portfolio for monitoring purposes, retains control over all trading commissions generated and our trading strategies usually add to the performance of our external advisors’ portfolios. Overall dispersion from the advisor’s composite performance is generally low.
However, when an advisor has a niche trading advantage over ERS, we recommend the advisor trade the portfolio.
The commissions generated are then applied towards broker research. ERS has a broker commission vote that is based on the quality of broker service and research. TCA performance is measured daily across all of our trades. We trade versus different benchmarks depending upon our portfolio managers’ instructions. We measure trading performance using arrival price, VWAP and closing price benchmarks.
Value of technology
Rob Newhall: One reason we believe our trading adds value is that ERS has always been extremely progressive towards trading and is very advanced technically. We test and then implement the best trading tools available, and have access to most sources of liquidity. We are quick to reach out to algo trading providers to offer feedback on quality of execution and request changes to algo settings to suit our trading style. Our traders are experienced market technicians that trade currencies, futures and options, in addition to global equities.
Meeting in the dark
Michael Clements: We believe consolidation of US dark venues would benefit block trading in this market. These dark venues remain too fragmented and many institutional participants do not have the same access to the block trades as well as the same priority of accessing each dark venue. It is not uncommon for institutional traders to encounter each other in several dark venues at the same time and then have to figure out which venue the counterparty wants to use to execute.
On this subject, we believe there are no significant differences between what pensions and asset managers want. We want the best of both worlds. We want a healthy competitive marketplace where bid/ask spreads are low, and a level playing field where rules are transparent and fair competition among all participants promotes vigorous markets.
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