Comments on: Investors: wake up to securities lending

By: Free Investment Management : WhereDoesAllMyMoneyGo.com

Free Investment Management : WhereDoesAllMyMoneyGo.com — Tue, 04 Aug 2009 20:31:44 +0000

[...] is exactly what Larry MacDonald had proposed (tongue in cheek) in a blog post of his some time ago… tweetmeme_url = [...]

By: Larry MacDonald

Larry MacDonald — Fri, 05 Jun 2009 17:17:11 +0000

FinanceProf
Good point. Fund-owners may “own” the lending fees but unless fund managers have the incentives to generate them, they’ll won’t be overly large. In Vanguard’s case, the incentive seems to come from wanting to be the lowest cost supplier. Maybe fund holders would be happy with that scenario even though it may not generate as much revenue from securities lending as giving additional, monetary incentives to lending agents. One reason for that preference may be to avoid the riskier practises regarding collateral etc. that could result from a more aggressive pursuit of lending. Still, fund-holders may wish to accept these risks and give greater incentives to lending agents but then we encounter the issue of who gets the contract. At Barclays, a non-arms length arrangement exists — one wonders if fund-holders would be better served with an arm’s length agent. Just a few thoughts off the cuff …

By: FinanceProf

FinanceProf — Fri, 05 Jun 2009 16:44:39 +0000

As is usually the case in finance, sec lending is much more complicated than one would think. Dig into the data, and you’ll find that the iShares funds get as much or more income from securities lending than the Vanguard funds, despite that 50% take. My guess is that the performance on a trading product like security lending is highly correlated to the incentives that the manager has. But no doubt, overall fees should be lower if VG buys the iShares. That doesn’t necessarily translate into better returns though.

By: Larry MacDonald

Larry MacDonald — Fri, 05 Jun 2009 14:16:18 +0000

Jordan
Like the mutual fund companies, ETF companies have divided loyalities between fund-holders and shareholders.

By: This and That: Bank of Canada rate decision, Bank earnings and more… | Canadian Capitalist

Fri, 05 Jun 2009 13:11:00 +0000

[...] MacDonald points out that ETF holders should wake up to how lucrative securities lending is and demand their fair share. Tongue in cheek, he suggests that securities lending could become so profitable that vendors will [...]

By: Jordan

Jordan — Fri, 05 Jun 2009 11:15:18 +0000

Wow, here I thought ETF’s were “different” then mutual funds, but it sounds like they play the same tricks.

Dimensional funds apparently outperform their benchmark indexes after fees. I wonder how much of their excess return is attributed to securities lending. If you could only slice off the advisor’s commission you’d be humming along.

By: A Lap Of The Blogs : WhereDoesAllMyMoneyGo.com

A Lap Of The Blogs : WhereDoesAllMyMoneyGo.com — Fri, 05 Jun 2009 04:04:22 +0000

[...] Larry MacDonald discusses securities lending by ETF manufacturers. This is worth reading, as is the article he links to which discusses securities lending practices by mutual funds. Briefly, securities lending is when a fund lends out securities (that YOU own) to short sellers (who must eventually give them back). The fund collects interest on the borrowed securities – but how much of that interest is passed on to the investor? Read on. [...]

By: A2

A2 — Wed, 03 Jun 2009 14:39:17 +0000

Fortunately, pensions and mutual funds are looking into alternative ways of lending out their securities that can reduce counterparty risk and increase their returns in a regulated manner.

By: Larry MacDonald

Larry MacDonald — Wed, 03 Jun 2009 13:16:51 +0000

Can Inves
Yes, the fund holders have the risk of securities lending yet only part or none of the gains (which I discuss in my column to come on Thursday).

By: Larry MacDonald

Larry MacDonald — Wed, 03 Jun 2009 13:15:25 +0000

Preet
If Vanguard buys iShares, they may possibly rebate the lending fees to fund holders (as they already do on their existing funds). So we could see much lower MERs at iShares. Now there would be something to rejoice.

By: CanadianInvestor

CanadianInvestor — Wed, 03 Jun 2009 09:53:04 +0000

Zweig’s revelation that the risk that if the person/company does not return your shares when requested, you are on the hook is incredible and shocking. I presume that is the same in Canada.

By: Preet

Preet — Wed, 03 Jun 2009 00:56:59 +0000

Interesting idea.

I heard inklings that Vanguard may ending up purchasing the iShares business as the CVC deal was subject to being outbid by other suitors for a period of time. I wonder if that would factor into the purchase price though…