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Report: affiliated agent lender return lower
17 November 2011
A new academic report into mutual funds returns from securities lending shows potential conflicts of interest when using agent lenders affiliated with fund sponsors. Stephanie Baxter reports
University of Texas Arlington
Securities lending returns are "dramatically lower" when
funds use lending agents affiliated with their sponsors,
according to a new academic report.
The report, which looks at whether affiliated lending agents
and mutual fund boards affect securities lending returns, was
carried out by academics at three universities in the US.
An affiliated agent is where the investment company that
manages the fund is under the same umbrella as that
fund’s lending agent.
Here, returns tend to be smaller and there are conflicts of
interests, said John Adams of the University of Texas
Arlington, who co-wrote the report.
Using securities lending data from 2003 to 2009, the research
found that returns are 70% lower and the amount of securities
on loan is 50% higher than the sample means when funds use
sponsor-affiliated lending agents.
However, returns are "significantly higher" when funds
administer their own lending programmes.
The report said this is a strong indicator that agency problems
are potentially severe in securities lending
"This finding strongly suggests that some affiliated
lending agents act to expropriate mutual fund shareholder
wealth," said the report.
According to Adams, the new research builds on an investigation
in 2004 by the Securities and Exchange Commission (SEC) into
the management of securities lending programmes for mutual
funds administered by several investment banks.
Although the investigation uncovered "potential conflicts of
interest" when funds used securities lending agents that were
affiliated with their sponsor, the SEC never disclosed the
findings of the report.
Adams said State Street and JPMorgan were some of the names
mentioned by SEC officials, but with no inclination of who came
out good or bad in the investigation.
The report also said that mutual funds tend to make higher
returns when they act as their own securities lending agent.
Funds who use custodian banks as lending agents only earn about
30 basis points per year on the securities they lend while
funds that act as their own agent make 110 basis points.
The report said the reasons behind this could be that funds
acting as their own agent – referred to as
'self-lending agents’ in the paper - can have
better terms from borrowers and do not incur securities lending
fees. It was also suggested that they might choose to only lend
profitable securities while custodians lending on behalf of
funds may choose to lend both high and low profit
The research also looked at whether mutual fund boards affect
securities lending returns. Returns tend to be lower when
boards are larger and when director pay is high, but are higher
when funds have boards with greater independence and gender
Adams said it was difficult to find information when carrying
out the study, pointing out that mutual funds are generally not
very transparent in their securities lending practices.
"When we asked them how much the fee was split, mostly they had
no idea what we were talking about or refused to divulge that
Adams said a lot of mutual fund sponsors seem to quit lending
and liquidate positions immediately before filing date so it
doesn’t look like they have securities on
"Transparency and disclosure can be improved," said Adams, who
added that mutual fund sponsors and boards need to be asking
questions such as: 'should we be more active and investing more
resources into lending?’, and 'should we be using
an affiliated lending agent or an independent
The report was produced by Adams, Sattar Mansi from the
Virginia Tech, and Takeshi Nishikawa at the University of
Colorado in Denver.