Effectively managing market data costs is not always an investment manager’s first priority. Here within we examine the contributing factors, and the opportunities for material cost savings.
by Mick Cartwright, CIPM
DRAINS ON THE MARKET DATA BUDGET
How often have you heard an investment manager say, “We don’t use that benchmark anymore.”? Probably more often than you’ve heard, “This benchmark is no longer being used and we have properly retired it. By doing so, we no longer need to pay for this data or go through the daily exercise of consuming, calculating and auditing it.”
Market data costs absorb a material portion of an investment manager’s budget allocation and benchmarks represent an important piece of that allocation. It is not as simple as taking the index such as S&P 500, the Russell 3000 or the Bloomberg Barclays Global Aggregate. In many cases, the manager is also consuming the underlying constituent data or index breakdowns of these indices, whether it be by GICS sector for an equity index, by country for an international index, by credit quality, sector or maturity for a bond index.
Getting the index is just the start of the process. As the manager sets up an appropriate benchmark to measure the investment portfolio against, they are likely creating blends of these indices, or calculated variants – index plus 60 bps to serve as our benchmarks. Firms may be paying a service provider to do this for us or setting it up in internal systems. No matter how firms provision the information, there is a tangible cost associated with set up, monitoring and maintenance.
Frankly, the benchmark side of the equation is probably the most straightforward. What about the actual underlying investments? Although firms can easily pay for instrument level benchmark information, how well does this information align with the investments in the…Read Full Article