Beneficial owners reconsider sec lending
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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