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November 1, 2001

How Barclays Conquered The World

By Peter Chapman

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One of the first things you notice about Barclays Global Investors (BGI) is the magic markers. Brightly colored four-packs seem to be affixed to every glass wall and whiteboard at the renowned quant shop. They are a testament to the penchant of executives for scribbling out complex financial formulas when strategizing.

This devotion to mathematics doesn't stop at the trading room door. Buyside shops everywhere are charged with obtaining best execution, but at BGI transaction costs are forecast even before the traders arrive at work. And, at the end of the day, traders are judged by how close their executions matched their benchmarks.

Such strict controls are necessary when you're managing index funds. With about $300 billion in equity assets under management pegged to over 200 global stock indices, San Francisco's BGI is the world's largest index manager. It was also the first, having invented the index fund in 1971 when the unit of the giant U.K. bank was known as Wells Fargo. Some of its rivals in this penny-pinching corner of the money management world are State Street Global Advisors (SSGA) and Deutsche Asset Management.

BGI has been part of Barclays - a very tiny part - since 1995 when the bank bought Wells Fargo Nikko Investment Advisors. Although its $800 billion in assets under management place it in the top five money managers worldwide, BGI's profits account for less than one percent of Barclays' total. Chalk that up to the highly competitive, low-fee, commoditized business of indexing.

Higher Fees

Low fees are why transaction cost control is the mantra at BGI. Although a growing portion of BGI's assets under management now fall under the active' category and command higher fees, most investments are passive' and do not involve stock picking. BGI's performance is based solely on how close its portfolios track the indices. And close tracking means minimizing trading costs.

That puts the pressure squarely on BGI's traders. Because the value of an index component is based on its closing price, traders must buy the stock at a price better or equal to its close. On top of that, most trades at BGI are for baskets of hundreds or thousands of shares.

Traders also must keep a tight rein on the size of the commissions and fees paid to brokers. All such explicit costs are passed back to BGI's clients, mostly government and corporate sponsors of pension plans.

"Our actual trading costs are formulated and estimated daily for every single security we want to trade the next day," said Minder Cheng, managing director and global head of equities and currencies trading at BGI. "Our traders are expected to keep those costs in mind. I don't believe more than a handful [of buyside shops] do something like this."

Cheng has run trading for BGI since 1999. The 38-year-old manager, who earned a doctorate from the University of California at Berkeley, previously worked as a proprietary trader and strategist at Convergence Asset Management, Sumitomo Finance International and Salomon Smith Barney.