| Transition performance measurement: transparency might be the answer |
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| 07/08/2005 | |
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Transition managers boast that they are much more cost-efficient for an investor than a do-it-yourself transition strategy. But how can you be so sure of such an assertion? The first thing, of course, would be to measure their performance. Easier said than done: take, for instance, Mellon Investment Services' last operation, which involved 22 different countries, 12,000 separate transactions and over 23 managers. "There is a tremendous amount of moving parts in a transition", accurately points out Mark Keleher, president of transition management at Mellon Global Investments. What's more, very few transitions are alike. Add all this up, and it should come as no surprise that a lack of a common standard for measuring the performance of a transition operation is a criticism frequently formulated by pension schemes. The very characteristics of transitions make it difficult for a scheme to know whether or not their move was a success or a failure, and whether it was right to resort to a specific transition manager. The measurement problem is rooted in the numerous potential sources of failure or success for a transition manager. "There are an awful lot of contributors to the overall performance drag of transitioning assets, from the explicit costs, which include fees and commissions, to the implicit costs such as the opportunity costs", says Natalie Pilcher, director of implementation services at the Russell Investment Group. Conversely, those various cost sources for the client mean that there are also various revenue opportunities for the transition manager, who can use different business models depending on the type of transition. If this information is not properly disclosed, the client might simply not know what he did pay for and where his money went, either to a broker-dealer, a consultant, or even an investment manager. Standard So, what should an investor do to know how good has fared his transition manager? The results of the 2004 Global Investor magazine transition management survey showed how much remains to be done before the measurement of transition management become fully standardized. According to the magazine, most of the larger transition managers agreed that the "implementation shortfall", i.e. the difference in asset value before and after the transition, was the correct measurement, while the other half said that other benchmarks were more appropriate. Yet, says Russell's Natalie Pilcher, "at some point, you have to standardise", adding that it would be hard to imagine a lack of a performance standard in the long-term traditional asset management space. That's why Russell came up two years ago with its own standard following extensive discussion with the industry, hoping that it would get the transition management industry closer to the quantitative standards found in the traditional long-term management industry – basically return and volatility. Based on the implementation shortfall and measuring performance on a cost basis, "the T-Standard is a measurement methodology that serves as a basic industry gauge for transition management", says Natalie Pilcher. The standard has been adopted by many pension schemes and even some transition managers, who nevertheless remain critical of its use on the ground that it does not accurately measure what they are actually paid for. "The T-Standard is a good starting point when evaluating a transition, but it does not effectively measure whether a transition was a success or not", says Mark Keleher. "There are numerous exogenous factors that are not taken into account by the T-Standard but which have an impact on a transition. That's why you have to drill down through the process to know exactly where the costs are coming from. It should not excuse a manager from having to explain where his costs are coming", he says. Russell is well aware of this criticism. "One of the criticisms levelled at the T-Standard is that it doesn't go far enough, in terms of attribution. However, this is no reason not to adopt a standard that gives an objective measure of performance from a client's perspective", says Natalie Pilcher. As it turns out, transparency should be a priority for most transition managers, whose activities, involving many players and opportunities for revenues, would certainly benefit from being measured uniformly. J.L. |
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Articles of the same Topic : Transition Management |
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