| As risk becomes investors' main focus, transition management takes a new turn |
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| 07/08/2005 | |
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Transition management is on the rise. Given the now heavier liabilities borne by pension constituents in case of a financial meltdown, an increasing number of schemes are taking the step to resort to a specialised transition manager when redefining their investment strategy in order to reduce their exposure to risk, and, why not, grasp a few more basis points of return in the process. Generally speaking, situations that can warrant a transition manager include the initial investment of a scheme, a change in investment universe or style, the firing and hiring of fund managers, as well as any other situations involving flows between funds or mandates. Occupational and local authority pension schemes are the most important clients of transition managers, but transition specialists say that even mutual fund managers are now asking for their support when implementing changes to their fund. Transitions, which in most cases involve the liquidation of some assets for a quick re-investment into other assets, expose investors to a series of risks, the main one being a loss of in value due to the one-time large market move – which some traders might have knowledge of – or more simply, an inadequate market timing for the investment. This is exactly what transition managers seek to stamp out. "Once we have secured the lowest possible risk transition, it is then possible for us to improve the efficiency of the process and to add value. We can look at some of the opportunities by measuring the alpha of assets that can help to prioritise the way we trade", says Steve Webster, head of transition management at ABN Amro. Specialization While there have been transitions ever since there have been institutional investors, specialised transition managers, which are nowadays project and investment managers providing a systematic and controlled transition process, have not always been around. Some of the transition jobs used to be performed by passive managers, which would take the assets into passive management for some time, and then pump it back into active management if requested. The transition business really started to take off during the 1990s, but rather slowly. "With the good performance of the market, people took their eyes off the ball", points out Mark Keleher, president of transition management at Mellon Global Investments. Lukewarm market performances since 2001 have led to a resurgence of the industry, as every singly opportunity to reduce cost or increase performance is now considered. "Pension schemes are now looking around for alpha", reminds Simon Hutchinson, senior transition management strategist at Northern Trust Global Investments. Transition managers are entrusted by their clients to act as a fiduciary free of any conflict of interests with both the legacy and the new manager. "Not using a transition manager may mean that the old investment manager that has lost the mandate is left to manage alone the asset sale, for which the motivation may not be very high", explains Simon Hutchinson, senior transition management strategist at Northern Trust Global Investments. "The results might then not be optimal", he says. Business growth Many pension schemes would in fact have a hard time to manage the new generation of transitions, which doesn't have much to do with what was done 20 or even 15 years ago. One of the reasons for this new environment is the move from balanced to specialist mandates, which has led to more complex investment structures. "There are now more clients restructuring their assets. A pension scheme would previously go from maybe one to two mandates when redesigning its investment strategy. A move from two managers to five or six new managers is now something that you see quite frequently, and it's difficult for a scheme to manage it without a transition manager", says Simon Hutchinson. With many pension schemes restructuring their portfolio so as to adapt to the current market conditions – often by investing more into alternatives – transition managers could pick up even more clients in the coming months. Illustrating that trend, Northern Trust Global Investments saw significant increases in its transition management business during 2004, when the value of its transitioned assets increased by more than 70 percent. "There's definitely a lot of interest from pension funds in the UK, as well as more awareness and more involvement from their consultants and investment managers", says Simon Hutchinson. "Continental Europe has been a little bit behind since consultants are not always involved in the investment process, but we keep talking to as many schemes as possible to further the interest in transition management", he adds. According to Mellon's Mark Keleher, the overall level of transition has remained constant year-to-year. Agreeing with his counterpart at Northern Trust, he says that the UK market has been particularly active due to the switch from balanced to specialist mandates of many pension schemes. The prospects for the market, he thinks, are quite good. "The transition market could grow if there is a pick up in mergers and acquisitions, which could cause sponsor companies to merge their pension schemes", he says. Mellon estimates at $2 trillion the global transition market. J.L. |
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