The Markets August 9, 2007

Institutional Investors Ramping Up Soft Dollar Allocations

Institutional investors have revived their use of commission payments for “soft dollar″ allocations, as the Securities and Exchange Commission (SEC) seems to have backed off its push to dramatically overhaul the rules governing such payments, according to recent research by Greenwich Associates.
Reported by

According to the firm, institutions are starting to return to paying third-party brokers for research and other services based on a growing belief that the SEC is not planning a dramatic overhaul of rules pertaining to Section 28(e). The SEC made the proposal to overhaul Section 28(e) in 2005, but has not yet implemented a rule change.

According to the firm, institutions had taken a more conservative stance with soft dollar arrangements as they waited for regulators to make a ruling. Industry-wide, soft dollar totals dropped 25% to $725 million in the 12-month period ending in February 2007 from $970 million the prior year, according to Greenwich Associates.

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As recently as 2004, more than 80% of institutions used soft dollars; by 2007 that proportion had fallen to 62%. In keeping with the general decline in usage, commissions directed for third-party products and services have dwindled as a proportion of overall U.S. equity commission payments, which totaled some $10.3 billion in the year ending February 2007, according to the announcement. Payments for third-party research products and services represented 9% of total commission payments in 2005 and 2006, but only 7% this year, according to Greenwich Associates.

However, use of such arrangements is expected to regain steam. When Greenwich Associates asked institutions to project their intended third-party products/services budgets for the coming year:

  • Institutions predict a bounce back to 10% of total commissions;
  • Investment managers predict that third-party allocations will jump to 13% in 2008;
  • Banks expect to increase allocations slightly from the current 20%;
  • 30% of institutions have set up client commission-sharing arrangements with brokers; and
  • 60% say they will have one in place within the next 12 months.
The Markets August 9, 2007

Emerging Equity Markets Continue to Outshine Developed Markets

Emerging equity market returns continued to outpace developed market returns in July, according to Standard&Poor’s global stock market review, The World By Numbers.
Reported by

Emerging equity markets rose 4.53% for the month versus a 2.02% loss for developed equity markets, according to an S&P press release. For the 12-month period ending in July, emerging markets returned a 53.94% gain, more than double the developed markets gain of 21.52%.

“U.S. concerns over liquidity, housing and fixed income instruments related to housing were the chief reasons for the downturn in the markets, while globally, the events were regarded solely as a U.S. issue,” said Howard Silverblatt, Senior Index Analyst at Standard & Poor’s, in the release.

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Only 12 of the 27 developed markets posted positive returns in July. Double-digit gains were posted by South Korea (+11.56%) and Slovenia (+10.42%). The top three markets by weight, Japan, United Kingdom and United States posted losses of 0.26%, 2.20% and 3.41%, respectively.

In July, 10 of the 25 emerging markets finished in positive territory, with Thailand (+14.17%), Turkey (+13.62%) and China (+14.47%) topping the list. Negative returns were posted for Mexico (-3.44%), the Philippines (-3.33%) and Pakistan (-3.25%).

Eight of the 10 sectors posted losses for the month, including Financials with a 4.27% decline. Materials (+1.12%) and Industrials (+0.96%) were the only sectors to post gains.

The S&P/Citigroup World by Numbers Report for July can be accessed by visiting www.standardandpoors.com/indices.

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