New Change FX conduct a good number of research pieces for asset owners and asset consultants every year. We conduct Transaction Cost Analysis (TCA) on data submitted by asset managers in order to assess the cost of the manager’s FX execution. This activity might take place as part of an ongoing process to check costs being incurred by managers, or as part of a process to select a new manager. What is clear from having conducted this process for some time now is that FX is taken very seriously by some managers, and not so seriously by others. FX execution in these cases is usually a non-speculative activity required by portfolio managers in order to pay for, redeem or correctly hedge assets denominated in non-base currency. Approaches to this vary amongst managers, and indeed, many asset owners choose to use their custodian for segregated managers rather than allowing the asset manager to execute the business. The first thing to understand is that costs vary enormously between managers and are not a standard rate somehow agreed between the FX providers. In fact, far from it…

The most efficient manager in this sample of asset managers running FX hedges on a G10 portfolio is paying just 3.44% of the most expensive manager’s fee, or roughly 1/29th of the least efficient manager. When you then consider that custodian FX costs might be two or three times higher than the worst outcome here it should be an issue of concern to the asset owners. What to do? NCFX recommend the independent assessment of FX costs. We recommend that asset owners either get this work done themselves or ask their managers or asset consultants to do so. It is important that asset managers are asked to measure their FX transactions against independent data, such as the regulated NCFX benchmark spot rates to eliminate any accidental flattering of FX costs by managers. Once you know your costs, it is relatively simple to begin managing them. The most important thing to recognise is that paying too much for FX provides you with no additional benefit whatsoever. It’s simply a drain on your portfolio.