Growth Segment: Minority Broker Dealers
Carl Weir, HSBC, provides a snapshot on the MFDV’s space, the market size, why it is interesting and the business possibilities in this market.
In the US, over the last few years, a small yet growing group of broker dealers has been stealing a march on the larger institutions for a share of the pension fund space. This group is known as Minority Female Disabled and Veteran (MFDV ) Broker Dealers. It is important to remember for the purpose of this article that MFDVs are known by such names as Qualified Minority Broker Dealers, MBE Broker Dealers, WBE Broker Dealers, Emerging Managers, Emerging Brokers, Underserved Broker Dealers and Economic Transacted Investment (ETI) Broker Dealers – to name but a few. This space requires identification for a number of reasons:
a The allocations of US state, municipal and corporate pension funds to this space are increasing year on year.
b The allocations are federal, state and municipal government mandated.
c Some MFDVs are getting allocations of funds to invest from multiple states and municipalities.
d Based on 2010 figures from Thomson Reuters, MFDVs have been outperforming larger institutions in the areas of fixed income and global equities (e.g. in 2010 MFDVs participated in 25.8% of all municipal fixed income transactions in Illinois, by volume, compared with 13.3% in New York, and 14.2% in California).
e Competitive investment performance is one of the primary factors driving demand for MFDVs among institutional investors.
f Diversification is leading to the potential for reduced risk through portfolio diversification in their investment strategies.
g Their focus is through specialization.
h They offer reduced organizational risk, and
i Reduced operational risk.
The simplest way of looking at this space, whether you are a buy-side or a sell-side institution, is to ask yourself: “Do I have a relationship, and am I obtaining order flow from a US pension fund?” If the answer is “Yes”, the assumption is that you are getting as much order flow as can be transacted with that pension fund. Then ask yourself: “Do I have a relationship, and am I obtaining order flow from a US or global investment manager of a US pension fund?”
If the answer is “Yes”, the assumption is that you are getting as much order flow as can be transacted with a US or global investment manager of a US pension fund. At this point you might see a light switch on above your head, as you ask yourself: “Hey, if the pension fund and the investment manager of the pension fund are both giving me order flow, then is the MFDV allocation of the fund not diluted between the two?” The answer is “No”.
Look at it this way... If a pension fund, for example Texas TRS (with Assets Under Management (AUM) as at 30 June 2010 of $92.3bn) dictated that 42.5% of assets are managed ‘externally’, but also states that investments through minority and women-owned businesses equals 5% of externally managed assets, then without access to MFDVs, your actual available order flow is only part of 37.5%, and so on.