| Transition management doesn't have to be painful for pensions - study |
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| 17/11/2002 | |
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Schroders fund management believes there is an alternative to conventional transition management, where pension funds attempt to reduce the proportion of higher risk assets in their portfolios in order to safeguard future liabilities and to avoid the need for top-ups. Many pension fund trustees and finance directors currently feel they have little choice but to go down this path, says Schroders' research, but managing the transition from equities into bonds is not always straightforward, and can result in 'hidden costs' over and above the quoted execution fees. Schroders says there is the potentially large loss associated with selling a large position into a sliding market over several days. There are also less obvious frictional costs, for example, the interest cost of deferring bond settlement in order to coincide with the equity settlement timetable. Instead, Schroders' head of structured investments, John McLaughlin, believes pension funds should be looking at managing transitions using structured overlays, "thereby offering the client protection". He comments: "The re-allocation of assets can then be effected in a timely manner at a much lower cost. An overlay might be executed in a matter of hours rather than days for example, giving the portfolio manager enough breathing space to then conduct the physical switch in a controlled and efficient manner. Alternatively, the overlay can be kept in position for a longer time period rendering any physical switching of assets unnecessary. This may be wise if the transition is a temporary one, since one avoids suffering the frictional costs all over again upon exit." McLaughlin says overlays significantly reduce the cost of the transition process, can be implemented swiftly and removed just as efficiently, "making them ideal for temporary shifts in asset allocation." This e-mail address is being protected from spam bots, you need JavaScript enabled to view it |
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