Growth Segment: Minority Broker Dealers
Ideally, if you are an MFDV you should be looking for international organizations with global infrastructure you can leverage, that can take you to more than 100 exchange destinations across the globe. Preferably you would want an organization that has a global reach for both execution and custody, and has ‘bricks and mortar’ (people on the ground that know the local market) including those in emerging markets. Also, you probably want to engage an organization who will not compete with you in your US institutional business.
Why should you care?
Based on data compiled in 2010 from Texas TRS, Albourne Associates, Altius Associates, Credit Suisse, Ennis Knupp, Hamilton Lane and The Townsend Group, of the top 16 US state (10) and corporate (6) pension funds with $1.68 trillion AUM, the total Minority Broker Universe is currently 469 firms (compared to the MFDV Universe recorded in the landmark 2005 LACERS Consultiva report figure of 29), with a combined $AUM of 423.7bn.
The investable Universe by pension funds for MFDVs with >$1bn AUM is 82 firms, with total AUM of $347.1bn. Not taking into account the diversity, products and activity of a $347.1-$423.7bn market would be foolhardy to say the least. To break this down into further total and investable Universes with an example of real pension fund commitment (Illinois pension funds have been intentionally overlooked as they are historically used as a benchmark, Texas Teachers Retirement System [Texas TRS] has been chosen to illustrate the growth of the MFDVs space outside Illinois):
For long-oriented equity the number of firms is quoted as 155 with a combined AUM of $301.7bn with 46 > $1bn AUM, and those with AUM >$1bn equating to $281.1bn. TRS’s commitment is to two MFDVs for $1.2bn, where the $1.2bn was committed to two women-owned MFDVs.
For hedge funds the number of firms is quoted as 21 with a combined AUM of $21bn with 7 > $1bn AUM, and those with AUM > $1bn equating to $18.1bn. TRS’s commitment is to three MFDVs for $370m, where the $370m was committed to two Asian-owned MFDVs.
For real estate the number of firms is quoted as 62 with a combined AUM of $16.5bn with 7 > $1bn AUM, and those with AUM > $1bn equating to $12.6bn. TRS’s commitment is to four MFDVs for $400m, where the $400m was committed to four African American-owned MFDVs.
For private equity the number of firms is quoted as 231 with a combined AUM of $84.5bn with 22 > $1bn AUM, and those with AUM > $1bn equating to $39.4bn. TRS’s commitment is to eleven MFDVs for $121m, where the $74m was committed to six African American -owned MFDVs; $21m was committed to two Hispanic-owned MFDVs; $15m was committed to one women-owned MFDV; and $8m was committed to two Asian-owned MFDVs.
Why do MFDVs and buy/sellsides need each other?
MFDVs are increasingly pushing for international products (especially equities) and an ever increasing international market reach. Therefore the access they need sits with the sell-sides. They require this to be more effective in this space. The MFDVs are eager to take advantage of the cross-asset FIX infrastructure provided by sell-sides at a minimum covering international equities, FX and fixed income. As MFDVs are utilizing complex algorithmic trading strategies in the US domestic market, they are looking to replicate that internationally. The pension funds and investment managers expect best execution.
New product offerings are of high importance to MFDVs. These include Exchange Traded Funds (ETFs), DeltaOne products, Asian markets, energy commodities and syndicated products. Due to the rapid change in the MFDV space new, emerging and minority brokerage programs are started all the time (e.g. Detroit MURS, a 97% paid-into pension fund implemented an MFDV policy from 1 January 2011), as such MFDVs need their sell-side partners to move quickly because:
- The pension funds expect the MFDV allocations to be acted upon in both an active and passive capacity.
- By not reacting, this will diminish increased allocations to the MFDVs which would in turn affect their partners. An example is the Ohio Police & Fire pension fund, where they have not been performing and their commissions from the pension fund were zero for 2010; as such, the two MFDVs asset allocation has been unchanged for the last two years.