Transaction costs can potentially erode a large part of an active manager's value added. The market impact, the largest component of transaction costs, has been for the most part neglectedprimarily because it is the hardest to measure and therefore to control. As a result of five years of research, Barra has developed a tool you can use to forecast and control market impact costs, and, in conjunction with the Aegis portfolio construction tool, reduce transaction costs and consequently improve performance.
The presence of transaction costs in the utility function and the ability to enter individual commission and market impact costs for each eligible security allow the manager to perform a realistic optimization where the implementation issues do impact the optimal solution along with more theoretical mean-variance efficiency considerations.