US - Despite the upward trajectory of US institutions' international equity holdings, the brokerage commissions paid by these investors on foreign stock trades have not grown at a similar rate, according to a report from Greenwich Associates.
In fact, total broker commissions paid by US institutions on international equity trades increased only by 7% year to year to $1.8bn.
John Feng, consultant at Greenwich Associates, said there were several explanations as to why this had happened.
Feng said: “For starters, currency appreciation does not necessarily translate into new trading business.
“Also, commission rates on agency trades fell from Q1 2004 to Q1 2005, continuing their multi-year decline. Third, institutional investors are directing an increasing portion of their trading volume to lower-cost options like program trades and self-directed electronic trading systems.
“Lastly, some institutions managing assets in the US will centralise their trading through London.”
The research also shows that average commission rates on European equity agency trades fell from 21bp in Q1 2004 to 19bp in Q1 2005.
Commission rates were also on the decline in Japanese equities, which fell from 19bp to 18bp, and throughout Asia. Rates on trades for Hong Kong shares fell from 29bp 12 months ago to 24bp in 2005.
At the same time, average rates dropped from 35 bps to 29bp on Taiwanese shares and from 34bp to 32bp on Korean equities.
Meanwhile, John Webster, also of Greenwich Associates, predicted that US institutional portfolios would continue to strengthen through incremental investment in international equities.
He said: “US pension funds are under significant pressure to generate alpha, and there is a widespread perception among institutional investors that overseas stocks are undervalued.
“Looking at these institutions’ expected rates of return, our research reveals an anticipated 50-60bp pickup in international equities relative to US stocks.”
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