PARTICIPANTS: 

• Alastair O’Dell, editor, Global Investor/ISF
  
• Naomi Heatley, DC product manager USS Investment Management
• Matthew Chessum, investment dealer, Aberdeen Asset Management
• Fuad Ahmed, investment management executive, Phoenix Group
• John Arnesen, global head of agency lending, BNP Paribas Securities Services
• Don D’Eramo, managing director, head securities finance, RBC I&TS
• Stephen Kiely, head of new business development, securities finance, EMEA, BNY Mellon
• Nancy Allen, director, DataLend Product Owner

Do beneficial owners look at particular equity and ask: ‘It’s trading 65bps and I’m getting 45bps in my programme, why?’

Chessum: I would. Aberdeen funds invest in relatively few positions, but in bigger sizes. I need to ensure that when we are one of the biggest holders of a special – especially in emerging markets – our agent lenders are performing.

Heatley: We are similar, a very big pension fund with concentrated holdings. Our approach is linked to our philosophy of responsible investment – the value of lending revenue versus corporate engagement. Our managers are often concerned about the lending – not necessarily in particular markets but for certain stocks. It must be worthwhile.

Ahmed: For us it’s the opposite, as we have a much smaller programme. It would be hard to justify the cost of detailed analysis. It’s about qualitative understanding of what’s driving revenue, without necessarily quantitatively analysing it out. How does it compare to other periods? What are the main drivers?

Arnesen: If you had that conversation with your provider and its response was ‘it’s staying at 45bps because this £300m of semi-GC is keeping that balance on’, would you accept that? The typical response is that it is linked to another transaction. We look at the ratio of specials to GC. Every borrower will tell you that if you squeeze everything out of it then you are going to have less activity. Do you just want activity on something that is very special?

Chessum: All that GC that earns me £20 a day, compared to the one special where I’m earning hundreds of pounds of day? If I suddenly saw huge amounts of very low-value activity being lent I’d say ‘bring it all back’. Currently, our lending book is mostly about emerging market names or smaller midcap stocks.

Kiely: Gone are the days when a client would complain to a relationship manager and say ‘why isn’t my utilisation higher?’ Everyone understands it’s not necessarily the route to higher returns.

Allen: Our tools are designed to help beneficial owners better understand the market conditions, identify trade opportunities and assess the impact of their risk profile on returns. Beneficial owners can assess performance at a portfolio or security level, not only against the market as a whole, but also by reviewing their performance relative to a peer group of similar beneficial owners. Another challenge for beneficial owners is accounting for restrictions and the revenue forfeited as a result of those restrictions. That’s another area where a performance measurement tool is valuable.

Chessum: That is the true value of data. If a stock were to fall 15% some portfolio managers say it must be due to shorting and want to recall it. But if the agent lender helps me show we are just a small percentage of the on-loan value, I can show that it would make no difference. It gives me ammunition – they’re more receptive if I go back with numbers.

Heatley: For us, the issue that drives cynicism among our portfolio managers is that the trustees take the lending revenue – the individual portfolio managers don’t get any benefit.

Ahmed: We don’t chase utilisation – we’re not lending everything and accepting any old collateral. Most of the revenue is expected to be generated from relatively few positions – around 20 positions in specials where very little on-loan drives significant revenue – so it will be easy to manage. We’ve incentivised the agent lender in the right way so it shares in the rewards. We struggle to see the benefit of benchmarking, given the size of our programme, but we could be persuaded if it demonstrably adds value.

Arnesen: It is now so much easier to have a well-informed conversation – even our sales materials have moved beyond that. My concern is that, while it is good that beneficial owners are more engaged, there will some that say it has become more trouble than it is worth.

Kiely: Some participants will leave or lose interest but the ones who are left, and new joiners, will understand it better and have greater comfort with the product. I’m all for it, frankly.

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