| Transition Management 101 |
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| 09/10/2005 | |
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Alister Van der Maas, Director of Transition Management at Deutsche Bank, answers this week's 101 on transition management 1- What is transition management? Transition management is the process of trading out of one portfolio of securities and into another, while controlling the timing of the transactions, the direct and indirect costs and the market exposure of the assets. The growing popularity in using a specialist transition manager has highlighted the importance of this service in today's pension fund industry. It can be applied not only to the termination and hiring of new managers, but also to the rebalancing between asset classes, large cash contributions, plan mergers and strategic changes within a fund. A transition manager can add considerable value to a pension fund during restructuring by effectively managing risks, minimising costs and acting as a project manager and guide. Recent developments in the industry have further improved the quality and cost of the transition management service, enabling asset owners to restructure at a fraction of the cost they may have experienced previously. 2- For an investor, what are the main benefits of resorting to a transition manager? Transition managers offer a variety of benefits to pension plans that range from project management to cost reduction and risk management. The most obvious benefit in using a transition manager is the ability to significantly reduce costs. Costs should be broken down into direct costs (commissions and taxes) and indirect costs (timing/opportunity cost and impact costs). Cost reductions are achieved through effective operational and portfolio risk management. From an operational perspective, the management of risk is handled by an experienced team who act as the main point of contact and coordinator for all aspects of the transition. Project managers should have in depth knowledge of the various asset management houses and custody banks and have the ability and experience to deal with any unexpected events that can often arise during transitions. Asset exposure and tracking errors of the target and destination portfolios are critical, as inefficient management can expose the fund to increased risk and the potential for increased cost. Another benefit of using a transition manager is less tangible and more qualitative. A transition manager has considerable expertise and experience in undertaking these large complicated restructuring exercises. For most pension funds and asset owners, restructuring is undertaken infrequently and thet therefore lack the necessary experience to be able to efficiently coordinate and manage the exercise. A specialist transition manager however, undertakes these exercises on a daily basis and has considerable experience in dealing with all the problems and issues that can arise. 3- Technically, what are the principal means used by a transition manager to transfer the assets from one portfolio into another? Transition managers use a large arsenal of tools in order to restructure the portfolios from the existing legacy portfolios into the new destination portfolios. Foremost amongst these tools are equity portfolio trading techniques, including the use of algorithmic trading. This has increased in popularity amongst transition managers in recent years because of the apparent control it gives the transition manager in over the point of execution. Transition managers are also able to apply more standard portfolio trading techniques such as agency and principal trading to achieve the specific objectives of each client. The benefits of being able to commit capital to achieve a client's desired objective are obvious, particularly when clients are time constrained or have illiquid securities and complex instruments to transact. One trading strategy that can be used to help reduce the risk and cost to a portfolio is crossing. It occurs when a transition manager can find the natural other side to a bargain, for example if the portfolio was selling 100,000 shares of Vodafone and the transition manager could find a buyer for those shares and negotiate to cross the securities at the mid price then there is no spread costs and no market impact. However a transition manager must have systems that can carefully monitor the impact of any cross on the entire portfolio, to cross without control or consideration for the entire portfolio may lead to adverse selection and therefore increased risk and cost. Another strategy used is portfolio trading, in which the transition manager transacts large portfolios of securities at a specified benchmark at reduced commission rates. Futures contracts have been traditionally used by transition managers to manage the market exposure shifts during the transition exercise. However, the risks of introducing additional instruments into the asset mix at the discretion of the transition manager must be analysed and understood and provide a clear benefit to the client. The ability to transact across asset classes, markets, and time zones defines a good transition manager. Increasingly, clients, especially pension funds and insurance companies, are demanding that their transition managers be able to execute portfolio restructurings that include both cash and derivative instruments. With more liability driven mandates being awarded, transition managers must also be able to transact total return, interest rate, and inflation swaps and be able to incorporate them seamlessly into the overall transition process. Specific instruments such as pooled vehicles require particular consideration and the analysis whether to in-specie or not, coupled with a full understanding of the costs and timing involved are key to ensuring costs and risks are minimised. |
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Articles of the same Serie : 101 |
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Articles of the same Topic : Transition Management |
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