GUTMANN CENTER FOR PORTFOLIO MANAGEMENT at the University of Vienna - http//:www.gutmann-center.at invites to the following PUBLIC LECTURE: (Apologies for any cross-listings!): Date: June 29th, 2006 - 4.00 p.m. Location: Bank Gutmann AG, Schwarzenbergplatz 16, 1010 Wien Speaker: Prof. Dr. Ananth MADHAVAN, Barclays Global Investors (BGI) Title: TRANSACTION COST MODELING AS A SOURCE OF ALPHA Abstract The impact of realized transaction costs on portfolio performance is now well recognized. Less well understood, however, is the effect of transaction cost on performance in the pre-trade dimension. Intuitively, transaction costs affects performance through the choice of bets the manager undertakes (breadth), the frequency of bets (turnover), and the size of those bets (order size). We show that transaction cost modeling is a source of alpha, increasing skill and breadth. Specifically, accurate transaction cost models allow managers to make better decisions regarding which securities should or should not be traded, and the optimal size of the trade. Further, improved forecasts of costs are critical to determining optimal portfolio turnover. Greater turnover allows for more active bets, increasing breadth, but magnifies the impact of trading costs. Balancing these considerations appropriately yields an optimal turnover level. Transaction cost models thus help reduce not only realized costs, but also improve performance on an ex ante basis. The analysis provides insights into the determinants of optimal fund capacity. We show that capacity problems are manifested gradually in the form of higher expected costs, reduced breadth, and lower turnover. Capacity is an elastic concept that is surprisingly responsive to even relatively modest gains in transaction cost control or forecasting ability. This suggests that fund managers can influence their capacity through investments in better execution research and technology. About Ananth Madhavan: Ananth Madhavan is the Global Head of Trading Research at BGI. He leads BGI's global trading research team with a focus on execution research and trading strategies across different asset classes worldwide. Prof. Madhavan also works closely with the global trading team and BGI’s alpha research and product groups to design and implement trading strategies capturing liquidity-driven market opportunities. Before joining BGI in 2003, Prof. Madhavan was Managing Director of Research of ITG, Inc. and a member of the firm’s management and executive committees. Previously, he was the Charles B. Thorton Professor of Finance at the Marshall School of Business at the University of Southern California, and Assistant Professor of Finance at the Wharton School of the University of Pennsylvania. Ananth Madhavan is the author of numerous publications in leading academic and practitioner journals. He received his PhD in Economics from Cornell University and BA from the University of Delhi, India. Please REGISTER: Mail: gutmann.bwl(a)univie.ac.at Phone: +43-1-4277-38186 - Fax: +43-1-4277-38074 Contact and further information: Gutmann Center for Portfolio Management University of Vienna - Mag. Dorothea GRIMM Bruenner Str. 72 - 1210 Wien (Austria) phone: +43-1-4277-38186 - fax: +43-1-4277-38074 mail: gutmann.bwl(a)univie.ac.at - web: www.gutmann-center.at