Transition Services Helping Asset Management Firms Make Advances
By Elizabeth Harrin (London)
It’s been a long time coming, but asset management firms are finally winning back market share in the transition services arena. As banks and brokers drop out of the marketplace, asset management firms are moving back in.
The Move Away from Transition Managers
Transition services is a business area which helps institutional investors transition from one fund manager to another, switch global pension deals, rebalance their portfolios or shift into a new asset class. It always involves a lot of funds, and it’s always complicated. A year on since Lehman Brothers Holdings – a major player in transition services – collapsed, other global banks have also cut out or scaled back their transition divisions, including Citigroup, Royal Bank of Scotland Group and UBS.
It’s not always the banks that are pushing investors away as they reduce their involvement in this area. There are signs that investors are also losing confidence in the bigger names, and turning to specialist or smaller firms – firms that can provide the certainty that their transition services business is a key market distinguisher. The shift in market share has also been helped by the fact that technology and trading venues that were once only available to broker/dealers are now much more widely accessible and firms choosing to put transition services at the heart of their business have the technology skills and budgets to put them on a level playing field.
That said, transition managers themselves are expensive people to have around: they have a highly skilled role, often with a broad background in finance and excellent risk management ability. They also have to be great at managing the relationships with clients and keep a lot of balls in the air at the same time. No investor wants to start a massive portfolio shift and build a relationship with someone in a firm where transitions are an ancillary part of the business and could get cut in the next round of cost-saving measures.
And, of course, investors are also looking to save money themselves. Hiring a transition manager provides the opportunity to remove the responsibility from the pension fund trustees, for example, who would rarely have the knowledge or capacity to oversee a huge transition. On top of that, fiduciaries retain the burden of investment performance during the time when cash is moving from one manager to another. It can be very costly to do nothing during this period and trust that market movements will be in your favour. However, huge transitions often come with organisational savings, which is why it is worth doing in the first place.
“The transfer process alone is incredibly complicated,” says Samantha Fraelich, Financial Representative at Bernard R. Wolfe & Associates, in Washington, D.C. “Especially when you’re dealing with the diverse types of investments that pension funds hold nowadays. They’re not just stocks and bonds in that portfolio like they may have been 10 or 15 years ago, they could hold hedge funds, derivatives, and other complicated investments.” Fraelich notes that even figuring out where it is possible to sell some of a fund’s assets can present enough of a challenge, putting aside overseeing efficient execution. “The trustees of a pension fund probably don’t have the expertise or knowledge to ensure a smooth process and would certainly be acting as responsible fiduciaries to get professional help, at a reasonable price, of course. But I would think paying 4 or 5 basis points to save 10 or 15 might be worth it,” she adds. In today’s market, when everyone is looking to make their businesses run as efficiently as possible, saving those basis points could well be worth it, with quick returns.
Transition Managers Valuable in Fund Management
With that in mind, it’s worth paying an expert to oversee the process and manage the risk for you in a complex transaction. There are sector imbalances, regional shifts, asset allocation changes and market capitalisation shifts to take into account and a transition manager can take a top-down view of a portfolio to understand the risk of the transition and eliminate it as quickly as possible. Typically, transition managers have a raft of trading strategies at their disposal to get the best outcome for the client and they oversee the trading process in detail.
“Transition management, much like many businesses, is cyclical,” says Steve Kirschner, Head of Transition Management, Americas at Russell Investments. “Russell has seen healthy signs within the business this year as the extreme levels of volatility have subsided and the execution environment has improved.” Kirschner thinks things are looking promising for the next cycle in transition services – and he should know: Russell was ranked “Best in Class” by investment managers in all categories of PLANSPONSOR’s 2009 transition management survey, and Kirschner’s team was named Transition Management Provider of the Year at this year’s U.K. Pensions Awards. “There have been several industry surveys released recently anticipating an increase in manager changes as well as asset allocation shifts, which bode well for the transition management industry,” he says. “We expect asset owners to continue to make changes to their portfolio compositions, especially in response to the market environment of the past couple of years.”
There a strong signs that Kirschner and Fraelich are right. Bank of New York Mellon and Northern Trust Global Investments have both reported an increase in assets transitioned against 2007. It’s too soon to know what the figures will be against 2008, but the general feeling among industry insiders is that things are looking up. Investors don’t need a transition manager for all their portfolio tweaks, but for the big things the smaller, skilled, players are stepping up to provide a service that the global banks and brokers can’t – or no longer want to – provide.