3. Corporate actions:
Who carries the cost?
These issues are costing us more than we think – and it is the end-investor that is carrying the ultimate impact
Corporate Action errors are more than an operational issue:
They are a cost to each of us
The greatest mistake that we can make is to believe that these costs are limited to the back office. The excessive costs of data and process duplication are not only huge but they are also growing, creating an invisible performance drag on our own (retail) investment portfolios.
1. Costs are spiralling
Faced with portfolio (holdings) growth growing by 31%, US investors are seeing their corporate action processing costs rise by approximately 17% this year - as years of duplication and manual process begin to conflict with the need for rapid growth and flexibility.
At the forefront of this cost growth is the cost of people.
As high quality expertise has become increasingly scarce across the financial services industry, the 'war for talent' has become particularly acute - especially in areas where highly repetitive processes predominate. Many organisations now cite the critical need that they face to retain the 2-3 experienced corporate action specialists that form the bedrock of their daily processes.
As a result, investors are now having to spend greater resources to recruit, train and retain new resources, whilst having to live with the increased, operational risks of having less-qualified staff manage their event processing.
Our processes today have created a heavy reliance on (specialist) talent - which we're now fighting to keep
Head of Investment Operations, Tier 2 Wealth Manager
Watch the expert view from our Corporate Actions for Investors webinar
Including views from Franklin Templeton, DTCC and the ValueExchange
2. We're only just beginning to see these costs
We always aggregate our operational costs at the management company - they never make it down to the fund level
COO, Tier 1 investment manager
Unfortunately, these swelling costs very rarely ever make it into investor reporting - outside of fund management companies' annual reports.
No managers that we have spoken with include corporate actions (or operational) costs as part of their Total Expense Ratios (TERs) - meaning that the ongoing performance and management of these costs escapes management and customer attention almost entirely. If a fund were to experience a multi-million dollar error (as has happened to 17% of US funds), its effects and impact would be absorbed across multiple portfolios, with little or no external reporting or discussion around potential consequences.
If you can't manage what you don't see, then there has been little incentive or transparency with which to manage corporate action efficiency to date.
Fortunately today the world's leading asset owners are starting to pay more attention. Realising the significant cost and risk impact of corporate actions, these institutional investors are now making sure that error rates and incidents are systematically tracked and reported in regular service and performance reviews with fund managers. Incidents are now escalated faster and given greater management attention than ever - as new light is shone on the dark corners of asset servicing.
3. We continue to pay for the costs of corporate actions
Yet, despite this gradual improvement amongst the world's most sophisticated and influential investors, we as end- or retail-investors continue to see only an imperceptible drag on our overall investment performance.
We know the costs are there but we have little ability to see or understand their performance or the actions that are being taken to manage them.
Corporate actions are a source of invisible performance drag for most investors
Portfolio manager, Tier 1 investment manager
