Why Railpen brought its trading desk in-house

Recent years have seen a growing debate about the relative benefits of industry consolidation and building in-house investment expertise across the sector.

Since embarking on our Investment Transformation Programme over a decade ago, Railpen has successfully developed a hybrid investment model, where in-house expertise is complemented by external support to enhance the firm’s overall investment capabilities.

In doing so, we believe we have set forth a model for how asset owners can take control of their asset management functions, deliver higher returns, reduce costs and ultimately maximise savings for members.

The success of the transformation programme meant that, by 2020, Railpen’s directly managed assets, trading volumes, infrastructure and team expertise had grown considerably in size and sophistication.

As a result, the insourcing of the trading desk was the obvious next step in the process of bringing investment closer to members.

Railpen’s in-house trading desk

In July 2021 we brought execution in-house following an in-depth review of the optimal model to meet the needs of our members.

The rationale was multi-faceted but some of the notable drivers included:

• The opportunity to integrate a trading function with the knowledge and expertise to support and enhance our portfolios;

• Improved pricing and execution quality arising from direct engagement with our counterparties;

• Reduced regulatory risk through aligning more easily with shifting regulatory regimes.

While cost savings were not the primary motivator, it was evident that our members would also benefit from not having to pay execution fees to an outsourced provider, and therefore that insourcing would provide additional material financial benefits in the long run.

Our approach to the transition

The entire process, from project initiation to the launch of the internal trading desk, took just over a year and was supported by Ergo Consultancy, who we appointed as project manager.

The delivery was technically challenging, especially against the backdrop of the pandemic. However, it was completed on time and under budget, resulting in further cost savings for our members.

We focused on three key deliverables:

• The selection and implementation of several best-in-class trading platforms covering Railpen’s cross-asset trading requirements;

• The introduction of comprehensive processes for handling Railpen’s order flow, including setting up extensive governance arrangements to monitor execution quality and outcomes;

• The staffing of the desk with full-time multi-asset traders.

The traders’ collective expertise has been instrumental in driving the trading desk’s success.

To date, we have executed thousands of trades totalling hundreds of billions of pounds across asset classes including equities, futures, fixed income, foreign exchange, and exchange-traded funds.

The insourcing has also delivered on all of the anticipated technical and operational benefits that come from owning the entire trading lifecycle, such as improving execution outcomes, reducing operational risk, and improving the matching rate of trades.

Most importantly for members, the trading desk has already realised several millions of pounds worth of explicit fee savings that would have otherwise been paid to an outsourced provider. It will continue to save millions more well into the future.

Lessons for the industry

We think this experience complicates one of the debates that has revolved around the Pensions Review – namely that of cost versus value.

Rather than being seen as a detractor, Railpen’s hybrid-model demonstrates that asset owners can deliver both reduced costs and superior value at the same time by bringing more decision making in-house.

But change doesn’t happen overnight. Our scale provided us with the resources and flexibility to focus on such a programme, and the prior work undertaken with the Investment Transformation Programme ensured we had built up sufficient expertise on how to do it right.

In short, while insourcing brings benefits, it goes hand in hand with building scale and expertise.

At a time when industry stakeholders are under pressure to streamline operations, reduce costs, consolidate, and improve governance, we at Railpen believe our model is a viable option worth consideration.

Our hybrid model approach is testament to the efficiencies and value that can be driven at scale – an important consideration where the government’s focus on consolidation, especially for defined benefit funds and the Local Government Pension Scheme, can drive better value for members.

Jack Crawley is a senior trader at Railpen.