Portfolio managers are a critical yet often separated part of the securities lending business. They are primary investors but may not necessarily be part of the lending process, which may happen behind the scenes. Bringing portfolio managers into the collateral and liquidity conversation through education and data can yield outsized results, especially as geopolitical and regulatory conditions continue to evolve.
Finadium surveys show that a wide range of relationships exist at US asset managers between portfolio managers and securities lending programs. In a best case, PMs are part of the lending decision by providing input into when potential sales may occur and may also benefit from lending data that may suggest market pressure on current holdings. In other instances, portfolio managers are less involved, and these programs sometimes measure success by how operationally efficient and in alignment to compliance metrics they are, alongside revenue benchmarks. Including PMs in the securities lending decision making process may help generate greater risk-adjusted returns.
Securities lending managers at US fund complexes have opportunities to speak with portfolio managers to enhance both securities lending programs and PM collateral and liquidity management, which often happen outside the purview of securities lending programs. By supporting PMs in these critical areas, managers can help transform the view of securities lending activities from a behind-the-scenes function to a high value-add front office deliverable.
Talking points for Securities Lending Managers
Securities lending managers can sit in a variety of positions relative to PMs. For example, they may be part of a treasury or operations team, may run an independent securities lending business, or may be portfolio managers themselves. Having collaborative relationships across the organization can set the stage for how to further the interests of shareholders in risk-adjusted revenue generation from lending.
PM opinions of their lending programs may differ whether the fund is active or passive. Passive funds tend to generate the most interest as incremental basis point earnings can help beat out competitors in return rankings. Managers already know the most about the PMs they work with and can tailor their conversation to the needs of the relevant professionals. Knowing which fund types care most about lending and which haven’t considered it much in the past is a starting point for future engagement.
Recently, Finadium and Fidelity Agency Lending have observed that the following talking points have resonated the most with PMs that participate in lending and some with PMs that don’t:
– The move to T+1 settlement in North America has been a non-issue. According to Finadium’s 2024 survey of asset managers in securities lending, 87% of firms reported no impact at all from T+1 and 13% reported a modest impact only (see Exhibit 1). PMs concerned about settlement fails may want to know that T+1 has made borrowers even more efficient in recall management, with some moving to T+0 even though this is not mandatory.
– Securities lending data can be used by PMs to help better understand portfolio holdings. Securities lending data can offer a wide range of insights including the level of shorting demand and liquidity metrics on utilization. Finadium recently found that 62% of asset managers have the ability to share regular securities lending data with their PMs, and this percentage has increased steadily since 2019 (see Exhibit 2). While not all PMs take them up on the offer, this transparency can be a useful way to track risk and liquidity factors.
– Technology now allows PMs to customize parameters and manage changes in an automated fashion. For PMs with concerns about ownership levels, liquidity, trading volumes, price, credit ratings or other factors, these parameters can be built into front-end systems to ensure compliance.
– International markets offer existing and new revenue opportunities. Brazil, Malaysia, Taiwan and South Korea have all offered robust revenues in equity market lending over the last three years, according to data from S&P Global Market Intelligence. Although starting from $8.9 million, equity lending revenues in Brazil have increased 87% from 2022 through November 2024, and regulators and market infrastructure are making changes to benefit international investors (see Exhibit 3). Malaysia equity revenues were up 68% and Taiwan is up 26% over the same period, while South Korean securities lending revenues were up 20% from 2022-2023 and then declined due to a short selling ban that is likely to end in 2025. In all four markets, US investors have the opportunity to lend opportunistically to generate fees in the 1-4% range.
– Securities lending drives market liquidity no matter which way the stock moves. Short sellers are not always correct in their expectation that a stock’s price will fall, but an increase in shorting activity means more trading volume today and when short sellers buy back their positions. That makes securities with increased shorting activity more liquid (narrower bid/ask spread) and easier, and possibly more cost effective, for PMs to buy and sell. Portfolio holdings may also be used as collateral for OTC derivatives transactions or single ISIN repos, which can add basis point returns to the fund’s shareholders.
– PMs may take an interest in how cash collateral is managed in their programs. Recent regulatory changes have caused some asset managers to move from prime money market funds for cash collateral to US Government money market funds. These changes may result in lower returns. Some options to generate higher returns with cash collateral are to have cash invested in two funds, prime and US government, or to use an Ultra-Short duration fund with prime-like guidelines. Another choice is to use an unregistered pooled account, which could provide new opportunities for both investing. Further, the management fees charged by any cash management vehicle can be a strategic advantage to securities lending programs or a net drag on returns, with current fees ranging from 0 to 23 bps according to SEC fund filings.
– The SEC’s Form N-PX that mandates reporting on holdings over proxy voting dates included information on whether a security was on loan over a vote period. Finadium’s work with ’40 Act funds finds that the majority of funds have clear policies on the materiality of voting and whether loaned securities should be recalled or not; most have seen no changes to their securities lending activity and expect none in the future from N-PX transparency. On the other hand, PMs at firms without a transparent voting policy may want to review their approach to proxy voting. Each PM in this case may want to have their own clearly defined policy on how to act. Some agents, like Fidelity Agency Lending, have built technological solutions to help clients manage this process, evaluate the impact on revenue and the materiality of the vote, and track decision making.
Doug Brown, Head of Business Development for Agency Lending at Fidelity Investments, notes that PM engagement with an agent lender has similar benefits to those that PMs receive by working with their equity and fixed income trading desks: “Just as fund performance varies by manager for numerous reasons, the same is true with respect to securities lending returns. Working with an agent who can potentially maximize your returns with the least operational friction can make a difference in not only fund returns/rankings, but also in oversight.”
For PMs, securities lending can become an integral part of managing a portfolio to optimize returns. In highly competitive fund markets, participating in lending and maintaining a strategic conversation between PMs, securities lending managers and agent lenders may generate substantive returns. This can mean the difference between beating and potentially trailing behind a benchmark and can deliver strategic market intelligence to PMs on their own holdings. Securities lending managers can engage with their PMs on how client portfolios can benefit from the process.
This article was commissioned by Fidelity Agency Lending, a division of Fidelity Capital Markets. For more information about Fidelity Agency Lending, please visit https://capitalmarkets.fidelity.com/fidelity-agency-lending.
Fidelity Agency Lending® is a part of Fidelity Capital Markets, a division of National Financial Services LLC, a member of NYSE, SIPC. Clearing, custody or other brokerage services may be provided by National Financial Services LLC, or Fidelity Brokerage Services LLC.
Finadium is an independent entity and is not affiliated with Fidelity Investments.