New Report: Transaction Fees Alone Could Cost Divested Institutions Billions of Dollars

WASHINGTON, June 1, 2016 /PRNewswire-USNewswire/ -- A groundbreaking new study released this week by Prof. Hendrik Bessembinder, professor of finance at the Arizona State University's Carey School of Business, finds the "hidden" costs related to divestment, including conducting the actual transaction and then actively managing the account, are significant – and in many cases may actually exceed in size the losses that divested institutions would expect to endure from weaker portfolio performance.

According to Bessembinder's research, transaction and management costs related to divestment – what he refers to in his paper as "frictional costs" – have the potential to rob endowments of as much as 12 percent of their total value over a 20-year timeframe. This includes the immediate transactions costs, as well as ongoing management fees to stay in line with the changing definition of "fossil free." Prof. Bessembinder estimates these frictional costs could cost a typical large endowment fund growing at a historically reasonable rate as much as $7.4 billion in value over a 20-year period.

"How a divested portfolio performs over time from a returns standpoint is a question we can model, but without a crystal ball, it's difficult to predict how securities will fare in the future," said Prof. Bessembinder, who also serves as managing editor of the Journal of Financial and Quantitative Analysis. "But we don't need a crystal ball to quantify the costs that divested institutions will be forced to bear by merely executing the necessary transactions. These costs have nothing at all to do with the speculative matter of how stocks or industries will do in the future. These are largely unavoidable costs, every institution that divests will incur them, and as my research shows, they significantly add up as time goes on."

In his paper, Prof. Bessembinder analyzes 30 separate U.S. universities of varying endowment sizes and quantifies what the frictional impact would be on each segment under a divested scenario as well as ongoing annual compliance costs. Combining these estimates, Bessembinder estimates that endowments would lose between two and 12 percent of their value due to divestment over a 20-year period – over and above any losses incurred due to weakened portfolio performance. 

"This study isn't about modeling the future – it's about quantifying what the actual, real-world costs are today for simply conducting the transaction, which often requires the wholesale sell-off of mutual funds and the transitioning of accounts over to activist management firms that charge sky-high fees for being 'fossil-free,' to the extent we even know what that means anymore," said Jeff Eshelman, senior vice president of the Independent Petroleum Association of America (IPAA), which commissioned the report but had no control or influence over its design or conclusions.

The Bessembinder report is available on DivestmentFacts.com.  

SOURCE Independent Petroleum Association of America

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