The primary goals of transition management – mitigating risk and minimising cost through the deployment of sophisticated trading strategies and strong team project management skills – remains the same regardless of the type of transition being carried out. However, the actual transition assignment, as well as the buyer of these services (i.e. sponsor), can take a variety of shapes and sizes.
Essentially, there are three main types of transition assignment in today’s market:
- Portfolio mandate changes. These are perhaps the most commonly recognised type of transition management assignment. Historically, the transition management industry began with these assignments and clients came predominantly from the pension fund industry. Today, these types of assignments can vary in scope and size -- from a simple single investment manager portfolio to the total restructuring of an entire pension fund. The latter being when many, if not all, of the portfolios are affected in some way -- for example, existing investment manager portfolio mandates could be completely terminated or reduced in favour of a new manager’s directives. Recent drivers of these changes have been corporate merger and acquisition activities, pension fund structure changes from defined benefit to defined contribution, or an increase in the amount of specialised investment mandates rather than balanced mandates.
- Portfolio liquidations. In this type of assignment, a client has decided to terminate, completely or partially, a portfolio or portfolios and wishes to receive the cash proceeds. With this type of event the client often wishes to use the cash proceeds for investment into other asset classes that require cash funding -- for example, non-traditional or alternative investments including hedge funds, property or private equity. Clients often feel more at ease with a transition manager handling the liquidation, rather than the terminated manager, because his or her motivation to achieve best execution may not be as high.
- Portfolio structurings or fundings. Transition managers offer these services to investors implementing new investment portfolio mandates or multiple mandates where funds are sourced from cash or time deposits. By hiring a transition manager in this instance, the client can continue their performance measurement without need for the new investment manager to have a ‘performance holiday’ at the start of a new mandate.
Common benefits
The benefits of utilising a transition manager are common in all three of the aforementioned scenarios:
Costs: Client gains direct control of explicit broker commissions paid in all trading. As there is a contractual arrangement between the transition manager and client, this is not a decision that is left to the discretion of the investment manager(s).
Consolidation: Benefits achieved by combining executions into one overall trading strategy. This can be very beneficial when there are several portfolios involved.
Timing: Client can be in control of the timing of when the portfolios will be invested and also can synchronise the start or end dates across multiple mandates.
Control: Centralised and controlled middle and back office operations. All of these operations are managed from one single resource – the transition manager.
Transparency: Fully disclosed costs of total implementation. Fully transparent reporting is made available to the client both pre- and post-transition assignment.
Today, there is a different level of sophistication and knowledge of the transition management product that new types of users (or sponsors) are bringing to the table. This has led to increased competition and new providers entering into the transition management arena.
Traditionally, the need for transition services has come from the institutional investment community – mainly plan sponsors and pension funds. This group is now being joined by a variety of financial institutions forming an increasingly significant client segment.
New entrants
This new segment can be further divided into four categories:
- First, the insurance company with an asset management division or subsidiary that is managing insurance assets in the form of investment portfolios. These companies have increasingly sought use of external investment managers. These mandates in some cases have completely replaced the internal asset management function and some are set-up to run alongside, although monitored closely by the internal investment divisions of the insurance firm.
- Second, multi-managers or fund of funds. These are firms that may manage some assets themselves, but effectively operate as a brand name and outsource some, if not all of the actual investment management function to a number of specialised investment managers or sub-advisors. Included in this group are a number of US mutual fund complexes with household names and a sizeable stable of managers to whom they allocate money. These are a growing segment outside the US, especially in the offshore funds marketplace. In this instance, mutual funds are often domiciled for tax purposes in locations such as Dublin and Luxembourg. Re-allocations within this manager universe are frequent for a number of reasons. The general global success in attracting clients’ assets to this type of product has meant increased mandates for the sub-advisors. Also, re-allocations can come about by a change in the asset allocation strategy of an underlying client investor or because the multi-manager themselves regard a particular manager as underperforming a benchmark. In this regard, such complexes are often more aggressive in changing managers, compared to a pension fund, for example. The length of mandate for this type of client can be significantly shorter than that for a traditional institutional investor. In some cases, one or two bad months for a multi-manager may mark the end of that underperforming manager’s duties.
- Investment managers who have been awarded third-party mandates from institutional investors form another important segment. Some investment managers are themselves beginning to question whether they want to handle an incoming portfolio transition when they win a mandate from a client when no transition manager has been appointed. Costs to their organisation to carry out the transition themselves can be a considerable distraction to front, middle and back office staff as they are taken away from their daily tasks. This is important to many in times when costs are key and select investment managers have looked to outsource some or all of their middle and back office operations. In these cases, the investment manager guides a client to use a transition manager.
- Central banks comprise another group of distinct users of transition services. While this group has historically held their reserves in gold, cash and time deposits with other banks around the world, a number of central banks, particularly those in developing markets, are now taking first steps into the global fixed income and equity markets and are hiring external investment managers. The central banks of developing markets are considering transition management as a key step in the investment process of establishing new external investment portfolio mandates along with the actual asset management, custody, accounting and reporting services offered by transition managers.
Investment behaviours
The expectations, mindsets and investment behaviours of these client groups often differ notably from traditional transition management users (i.e. pension plans). Financial institutions are more aware and sensitive to the total costs of a transition beyond that of explicit broker commissions, simply because they are more aware of the implicit costs of trading and the risk management issues involved in a transition. As financial institutions their job is managing money, while pension plans tend to outsource that function.
With the exception of central banks, these client groups tend to make rapid judgements and move swiftly. For example, a typical pension plan may be comfortable to see a transition implemented over two or three weeks. The transition time frame expected by financial institutions is usually much more aggressive. At the same time the level of pre-transition discussion with a financial institution is often considerably more detailed than those discussions with a pension fund client. Often, financial institutions want more information regarding strategy and financials. These clients are keen to know how a transition will be implemented, the trading strategies employed and how the attendant risk will be managed.
Once a transition is underway for a financial institution, it will tend to be closely monitored by the client. If the client is a publicly traded mutual fund, the process can be complicated by the need to strike net asset valuations (NAVs) each day and communicate them to the shareholders. These transitions have a daily accounting component that is more complex than those for pension fund portfolios, which tend to carry out accounting on a monthly basis.
While we expect financial institutions to grow as a client segment to equal that of institutional investors, we do not anticipate the development of a two-tier market for transition management services or the delivery of such services. Rather, we anticipate that the increased expectations introduced by financial institution clients may become pervasive through all client segments over time. We find this a welcome development from a transition management provider standpoint. While it may put a greater burden on providers, it will inevitably lead to a deeper appreciation of the transition management process among a wider community of buyers.
IN ASSOCIATION WITH
BNY Global Transition Management
BNY Global Transition Management is a leader in multi-asset class transitions providing plan sponsors and other institutional investors worldwide with end-to-end transition capabilities and conflict-free client advocacy to preserve assets, manage risk and control costs. We have the expertise, capabilities and resources to deliver seamless single-source transition solutions. Our reach is global, meeting the transition management needs of clients throughout the world. BNY Global Transition Management has offices in New York, London, Sydney and Tokyo and is a division of BNY Brokerage Inc., a wholly owned subsidiary of The Bank of New York and a member of BNY Securities Group.
In Europe, BNY Global Transition Management operates as a division of BNY Securities Limited, registered in England and Wales No. 3766757, in the UK authorised and regulated by the FSA.
