Cost-effective portfolio implementation is vital to our investment process. Our trading is based strictly on best execution and aims to minimize total transaction costs. We measure transaction costs as implementation shortfall — the difference between valuation price and execution price, including commissions (about 1¢ per share on average), spreads, market impact, and opportunity cost. Stamp duties and swap and borrow costs are also considered, where applicable.
We capture actual trading results in our transaction-cost model to guide our selection of trading methods and venues. Direct market access, broker algorithms, passive crossing networks, principal risk packages, agency basket trading, and traditional agency trading are techniques we use, at our traders’ discretion, to achieve best execution. Our transaction-cost model also informs our rebalancing effort: realistic, empirically derived, stock-specific estimates of cost help us assess purchases and sales. Annual turnover ranges from around 50% to 300% (per side), depending on the strategy. AJO does not use soft dollars.