How much of your
international trading do you handle remotely from your South African trading
markets, the portfolio construction is reasonably passive. It’s more index tracking
with selective stock picking. All trades are executed from Cape Town. We’re basically in the same time
zone as the UK and Europe, so from that perspective it’s simple. If it’s an FX
transaction we can trade in any currency across the world from Cape Town via a South
African bank like Standard Bank or RMB. In terms of equity execution we usually
route it via an international investment bank, generally through Paris or London.
The administrative side is handled out of Cape
Town. It’s just the custodian that is based in the
domain where you purchase.
equities, our trading frequency in foreign markets is limited. We recently
unbundled a portfolio managed by a fund of funds manager and constructed our
own MSCI World ETF fund. An ETF is going to stay in your portfolio for up to
six months to a year, leaving you to execute a small number of trades on an ad
hoc basis to tweak the portfolio. Getting best execution here is not the
and unbundling are obligatory for UK-based traders. To what extent do you see
these as precedents that should be observed in your own trading operations,
regardless of whether there’s a regulatory following wind?
months ago we started implementing a process of unbundling. The catalyst for this
was, first, that there are ethics around this whole issue. As a firm we
prescribe to the CFA Institute’s code of ethics and one of the core concerns there
is transparency. The client needs to know how we are spending his brokerage and
why. Secondly, it was to enable our dealing desk to evolve and become more
involved in the investment process. Now we utilise execution shops that are
efficient and source research from partners that will add value to a client’s investments.
And if we can’t compensate them on the execution side, I have the option of
using commission-sharing agreements (CSAs) to channel the funds. We explained
the ethics around this to our clients. In agreeing to this, clients altered
their mandates. The next step was to enter into CSAs with broking partners that
we typically trade high volumes with. We intend to have two big multinational houses
as partners and one of our algorithmic trading suppliers as a third partner.
Where you rely
on the sell-side for execution, do you have a preference for global or local
If you look
at the South African market and focus on how the execution side of the broader
market operates, the majority of ‘true’ liquidity lies with those big
multinational brokers that have a local footprint here. Not only do they see
domestic flows but also huge international flows and have a ‘prop’ book behind
it. With the smaller domestic brokerage firms we quite often find that their
execution is average. In the future, they will either have to link up with a
major international house or develop a specialised trading desk. There are
people here that specialise in small-cap execution, transition management or
basket trading, for example.
How do you
measure best execution?
understand what is a best execution you need to assess the goal in implementing
a specific trade. That starts when the trader has the conversation with the
portfolio manager. In its simplest form one should look at an implementation
shortfall model where you have a reasonably liquid counter. The model will
attempt to quantify the expected impact and compare that to the final execution.
That’s straightforward in a market like South Africa where you have a
single exchange. Any one of a number of benchmarks can be applied to see if the
trade execution was done properly. However, in some foreign markets, especially
where you have fragmentation, it’s extremely difficult.
best execution on a trade-by-trade basis is possible but very challenging. Our
expectation of post-trade analytics is that, over time, it can single out good
execution shops from bad. You can’t blindly accept that each and every trade is
accurately measured. So in terms of best execution we like to map trends.