4: Obituary – Steve Webster | A tribute to Steve Webster, long-time friend of the transition management guide, who sadly passed away recently.
5: Inflation, interest rates take their toll Industry experts discuss how last year’s sharp increase in the cost of living and the cost of borrowing money impacted transition timing, management and trading in 2022.
10: Working it out | Over the last 12 months a number of high profile business leaders have called for a return to office working. We look at how transition managers are balancing workplace considerations.
14: Technology maximisation | IT systems may play a major role in the transition management process - especially when it comes to interpreting data – but human input remains fundamental to successful outcomes.
18: The client-trader interface | Firms have long recognised the value of getting traders more closely involved in the transition process and obtaining their feedback on key issues.
22: A complex situation? | Global Investor assesses the key criteria for determining whether a transition is complex and how managers go about managing such transitions.
26: Industry roundtable | In early December 2022, Global Investor brought together the industry’s leading transition managers and consultants to discuss some of the key issues affecting clients.
49: Directory | Contact details for the key firms in the transition management industry.
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We were saddened to learn of the passing of Steve Webster, a longterm stalwart of the transition management industry and contributor to the transition management roundtable over many years, aged 54 following a year-long battle with cancer.
Down-to-earth and knowledgeable on all things transition-related (and beyond), Steve will be remembered as a kind and caring friend and colleague by all those who knew him.
Fresh out of school, Steve began his career at the London Stock Exchange in 1988, working as a guide in the public viewing gallery before later moving to manage the Exchange’s broker relationships.
In 1998 he commenced his career in transition management, working in and later leading teams at ITG, J.P. Morgan, ABN AMRO, Credit
Suisse and finally State Street. A number of our roundtable contributors could have called Steve a colleague at some point.
Off the trading floor, Steve had a wide range of interests extending to motorbikes, skiing and sailing as well as being an avid supporter of Tottenham Hotspur.
In 2017, Steve joined the investment advisory team at Allenbridge, later part of MJ Hudson, to offer transition consulting services to various institutional clients. As well as client work, he conducted surveys and peer analysis of all current transition managers’ offerings and performance data.
He remained dedicated to securing the best outcome for his clients and always aimed to keep his former colleagues in check!
Steve is survived by his son Cameron, and his wife Cathy.
As markets ponder the next moves from central banks, we look at how rampant inflation and rising interest rates have impacted transition timing, management and trading.
When the Federal Reserve raised its benchmark interest rate by 0.25% in February – the eighth increase in the space of 12 months - the target range reached its highest level since late 2007.
In Europe, the ECB raised the key interest rate for the first time in 11 years last summer and followed this with three further increases, while in the UK the official bank rate has risen from 0.25% to 4% over the last 14 months.
The decision of central banks to raise rates and rein in their balance sheets had an impact on the asset allocation decisions of asset owners and the impact of this new macroeconomic environment was evident on the timing of
allocation events, particularly when reallocating within an asset class (for example, fixed income, long duration to short duration) and in equities, where there were significant regional or sector skews explains Andrew Orr, senior multi-asset transition manager at Citi.
“From a management perspective, the cost effectiveness of hedging and transition strategies came under renewed focus,” he says. “Hedging required an extensive review of derivative and proxy solutions, while the strategy focused on how effectively to contain implementation costs. With regards to trading, the pace and order of executions focused on accommodating market dynamics.”
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Macquarie Capital focuses on expected economic announcements and how they could affect the trading risks in the transition, so it made sense to have a particular focus on those when it knew that central banks had a strong focus on rates and where they were going.
“There were various points last year where we saw liquidity challenges in certain markets,” says Paul McGee, head of portfolio solutions EMEA. “Gilts was one after the UK mini budget where we saw a big sell off and high yield was another where the markets went through quite a risk off phase in September and October.”
There is no doubt that concerns around inflation and where interest rates were going were a challenge for clients when planning events in 2022.
“Our assessment of liquidity in the market was constantly being revised depending on where we were in the cycle,” says McGee. “It probably meant that we were tiptoeing around certain dates more than perhaps we normally would, because we were seeing some significant reaction to central bank meetings and announcements.”
He describes the last 12 months as being among the most volatile periods the firm has encountered and notes that it presented considerable challenges for certain clients and their investment managers in needing to be able to raise cash quickly to meet redemptions.
McGee agrees that finding the right asset mix was more difficult over that period with the late September/October turmoil making many clients take stock and pause what they were doing – and suggests that at least some of these clients are probably still going through strategic reviews.
“We would normally see quite a rush of transition events into a year-end - a bit of
Hedging required an extensive review of derivative and proxy solutions, while the strategy focused on how effectively to contain implementation costs.
housekeeping potentially getting things tidied up - but we didn’t see that normal flurry of activity,” says McGee.
“Instead, clients were just digesting what had gone on. Markets were a bit volatile and they decided to pause and reconsider planned events. So we expect 2023 to be very busy and I think some of that will be from clients who put things on hold in the final quarter of last year.”
James Woodward, global head of State Street’s transition management business observes that making large portfolio changes during volatile markets is not ideal - the perfect environment is a calm market with strong liquidity. But the ultimate decision depends on what the portfolio is and what the
investment objectives are because volatility and changes in return profiles can be catalysts for change.
“The important thing to consider here is the opportunity cost of a delay,” he says. “We saw a lot of activity in 2022 where clients wanted to reposition portfolios for new environments. In terms of the asset mix, we have certainly seen clients shift to portfolios that are more likely to provide the greatest suitability in a different return and economic outlook.”
BlackRock expects to see clients rotating fixed income allocations as that asset class becomes more attractive with recent rate moves and has witnessed a marked increase
in demand for fixed income transitions versus equity recently. Andy Gilbert, EMEA head of transition client strategy expects this trend to continue through 2023.
It is incumbent on the transition manager to give the client the required inputs and data to enable the latter to make informed decisions with regard to timing explains Nick Hogwood, EMEA head of transition management at BlackRock.
“Earnings, local holidays, economic releases and data prints are all things which can be planned for and worked around,” he says. “However, macroeconomic concerns such as inflation can give clients reason to pause and reassess their situations in light of the changing environment. The transition manager’s analytical inputs with regard to the client’s portfolio in the current context are invaluable.”
All of the challenges that arose in 2022, from the conflict in Ukraine to the impact of rising rates and inflation had a marked impact, leading to a fall in volumes compared to 2021 according to Chris Adolph, director, customised portfolio solutions EMEA, Russell Investments.
“Just as we saw a bounce back in volumes in 2021 following the outbreak of Covid in 2020, so 2023 has already started strongly,” he says. “However, volatility will continue to have an impact. A poll we took of clients at the back end of 2022 highlighted volatility as their biggest overall concern in 2023 and we expect this to impact transitions in the form of wider mean estimates (especially in fixed income, where liquidity has been challenging at times) and wider ranges around those estimates, along with potentially longer time frames to complete events.”
BlackRock expects to see clients rotating fixed income allocations as that asset class becomes more attractive with recent rate moves and has witnessed a marked increase in demand for fixed income transitions versus equity recently.Andy Gilbert, EMEA head of transition client strategy,
BlackRock
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Over the last 12 months a number of high profile business leaders have called for a return to office working – so where does the transition management industry stand on this issue?
Goldman Sachs CEO, David Solomon, is one of the financial services heads to have called for a return to staff working from the office. Last year he described remote working as an aberration that was not conducive to productivity, adding that he did not think it was ideal for a business with an innovative, collaborative apprenticeship culture.
According to Cyril Vidal, head of portfoliotransition solutions at Goldman Sachs, these values are particularly relevant for transition managers who need to collaborate, to change and improve their processes.
“We have juniors joining who need to learn the ropes so apprenticeship is very important to us and that requires that people spend the majority of their time in office,” he says.
“On the flip side, what is quite nice about
transition management is the fact that there are natural cycles in the workload. You can be very busy if you have executions, but at other time you may be doing analytical work, in which case whether you are at home or in an office may not make much of a difference. It is good to be able to have that flexibility and we certainly make the most of it.”
Vidal adds that if he were hiring a transition manager, he would ask where the transition was going to be managed from and would view it more positively if he knew that all the individuals involved were in the same location to maximise collaboration.
“If we need to monitor the settlement of assets, for example, I find it more productive if I go to the desk to talk to my operations team,” he says. “Nothing can replace that interaction.”
There has certainly been a renewed demand and expectation to return to on-site visits which enhance building rapport, trust, and transparency which can never be replaced in a purely virtual world.
That is the view of Ashish Patel, EMEA head of transition management at Citi, who also acknowledges that this approach has to be balanced against consideration of the environmental impact of frequent air travel.
“Video calls continue to play an important part in the ‘new normal’ post-pandemic environment,” he says. “However, in person meetings particularly benefit the most complex transitions as there is a direct dialogue on building rapport and understanding the client’s needs, identifying the biggest risks, and discussing the optimal solutions. It most certainly drives greater efficiency and transparency.”
Paul McGee, head of portfolio solutions
EMEA at Macquarie Capital observes that the
transition management team are spending more time in the office now than they have done at any time in the last three years and that the return of face-to-face meetings is notable.
“Clients are now willing to accept face-toface meetings again, which is very encouraging and pleasing,” he says. “Amongst transition managers I am pretty certain that speak for them all when I say that there is more time being spent in the office than any point over the last three years.”
But while the transition management providers are back in the office, it is often the case that clients potentially aren’t so much, with McGee noting that there are still a number of clients he reaches out to to try and get a meeting where the answer is that they are only in one or maybe two days a week.
“We embrace hybrid working as long as there is not a drop off in the quality of work or level of client service,” he says. “There is no doubt there are some benefits to the remote meeting – for example, due diligence meetings can be quite time consuming and involve an awful lot of attendees needing to be pulled together on the same day or same time. So remote meetings can be helpful when not everybody can attend on a certain day or time.”
And then there is the environmental factor, which he agrees should not be dismissed. Where significant travel is involved, is it really necessary to jump on a flight and incur huge costs (and obviously the environmental effect that goes with it) when it can be just as well covered remotely?
McGee explains that when you are looking to engage with a new client or get added to a transition panel there is usually a lengthy due diligence process, so you can’t get away
from wanting to meet people in person, to make sure that what is being said in an RFP is actually correct, meet the people that have been referred to in these documents, and see the systems in action.
“That used to involve hosting the client in your office for somewhere between half a day and a whole day and bringing an awful lot of people into the room,” he says. “This required a great deal of planning and time consuming travel - now a due diligence meeting can easily be carved up into three or four small chunks.”
“If they happen to be in the office and want
to meet the traders and see the systems we have covered that off, but then when they just want to hear from our support functions about controls this can be just as easily done on screen.”
An employee’s role will often determine how much time they are in the office and whether they can work remotely or spend more time working remotely. “For our transition team, in most cases our people are in the office the majority of the time,” says James Woodward, global head of State Street’s transition management business.
There are a number of reasons for this, the first of which being that it offers stability in terms of connectivity to data. If you are in a trading role, access to market data is very important. But there are other factors - if you are on the team and have new people to train, it is important to have a strong cohort of experienced people in the office - and communication is much easier when everyone is in the office.
“We haven’t restricted client contact since markets opened up again because we do want to be in front of our customers to understand their strategies and priorities and how we might be able to add value and position ourselves in response to customer demands,” adds Woodward.
There are components of the transition manager’s role that can effectively be done from a remote location, but equally there are components that can only be completed in the office agrees Andy Gilbert, EMEA head of transition client strategy, BlackRock.
“When you are in the thick of a trade there is immeasurable benefit to being on site in terms of the collaboration opportunities afforded with peers and managers,” he says. “There will
We have juniors joining who need to learn the ropes so apprenticeship is very important to us and that requires that people spend the majority of their time in office.Cyril Vidal, head of portfolio transition solutions at Goldman Sachs
always be a portion of the transition manager’s job that is best executed in the office.”
Nick Hogwood, EMEA head of transition management at BlackRock explains that the client decision to meet in person or virtually is often not a binary one and tends to be taken based on the motivation for meeting.
“Amongst our clients, we have seen that most are happy to have weekly planning calls or trade progress calls virtually and these videobased calls are already an upgrade on the telephone-based calls held pre-pandemic,” he says. “However, for more substantial meetingssuch as due diligence reviews or panel pitches - nothing beats meeting in person. Whatever the client preference is, it falls to the transition manager to accommodate that.”
Each firm finds their own balance as to what works for their teams and their clients. Whilst on the trading side there is more of a push to be back in the office full time, on the portfolio management side the majority of time has still been spent working remotely – although this tends to vary by client and personal circumstances.
That is the view of Chris Adolph, director, customised portfolio solutions EMEA, Russell Investments, who adds that with mirror images of systems set up at the portfolio managers’ homes, it has never been easier - or more efficient - to work remotely.
“If anything, remote working has led to an overall increase in collaboration with all strategies and events being discussed by the whole transition team,” he says. “In our case there is no split by strategist or project manager - clients have a single point of contact that manages every aspect of the event.”
That is not to say they don’t leverage all
aspects of the wider firm such as trading, compliance, operations, and quant (and each event has a back-up portfolio manager), but co-ordination with clients is made easier with a single contact point.
“Of course it is preferable to have discussions face-to-face, but other than in pitches for events that was rarely the case in transition management with teams covering a wide geographical area,” says Adolph. “That said, the desire is still to strengthen those relationships and there is a strong preference to have update or due diligence meetings on a face-to-face basis.”
If anything, remote working has led to an overall increase in collaboration with all strategies and events being discussed by the whole transition team.Chris Adolph, director, customised portfolio solutions EMEA, Russell Investments
Technology may play a major role in the transition management process - especially when it comes to interpreting data – but human input remains fundamental to successful outcomes.
The financial services sector continues to invest significant sums on technology. Gartner estimated that banks and investment firms would spend around $620 billion on technology products and services in 2022, applying generative AI in growth areas such as fraud detection, trading prediction, and risk factor modelling.
“While growth is the top priority, the need to manage risk, optimise costs and increase efficiency also requires new technology innovations,” says Moutusi Sau, VP analyst at Gartner. “Generative AI enables bank CIOs to
offer technology solutions to the business in pursuit of revenue growth.”
IT spending by banking and investment services firms was forecast to grow by 6.1% in 2022. The largest category of spending is IT services, which includes consulting and managed services and accounts for 42% of total IT spending in the sector. The fastest growing category is software, with spending forecasted to increase by 11.5%.
According to Ashish Patel, EMEA head of transition management at Citi, the greatest advancements to technology at transition
management level will continue to be driven by the integration of AI in trading algorithms and risk analytics to deliver greater efficiency and reduction in trading costs.
“AI will continue to dominate capital investment as it industrialises multiple sectors and it seems like we have only scratched the surface of what it can do,” he adds.
Technology will always be a critical part of transition trading and analysis as it is a core component of the process to keep pushing the boundaries to benefit both client and transition manager.
A transition team increasingly needs to have someone who understands what is happening ‘under the bonnet’ when it comes to everevolving technology, analysis and strategies, suggests Stuart Zanchi, senior multi-asset transition manager at Citi.
“With that in mind, nothing is going to take away from the intrinsic need for human interpretation of data and human design and upkeep of these technologies as well as a trusted relationship,” he says. “This is particularly pertinent on the more complex transitions and as clients engage transition managers earlier in the project development process.”
Paul McGee, head of portfolio solutions EMEA, Macquarie Capital refers to growth in portfolio trade optimisers, and in fixed income more automation in the execution of smaller trades - auto filling of small orders as long as they fall within certain criteria.
“Benchmarking the performance of our technology is not something we do once a year or or every 18 months,” he says. “It is a daily exercise to determine whether these tools are adding value, managing risk, or minimising costs for clients.”
McGee reckons there is no substitute for a trader or traders overlaying the technology.
“We need human interaction and interpretation of trading strategy because transition management is about more than just putting trades down a pipe and pressing a button. We need trading desks who oversee these tools to still have an input in the way that a trade will play out.”
AIwill continue to dominate capital investment as it industrialises multiple sectors and it seems like we have only scratched the surface of what it can do. Ashish Patel, EMEA head of transition management at Citi
State Street undertakes a lot of large, complex, multi-asset class transactions so has invested in a technology stack. Some of that is proprietary and some is third party vendors providing it with tools to manage data and portfolios, assess risk and cost, and deliver better intelligence.
“Over the last two years we have spent time investing in transaction cost analytics, which enables us to analyse events and explore our universe data more effectively and leverage components of that intelligence and experience to define our execution strategies or provide insights into how we should source liquidity or even access markets,” explains James Woodward, global head of State Street’s transition management business.
The benchmarking process depends whether
it is third party or proprietary technology.
In the case of the latter it is a constant process where the company is able to get feedback in terms of what it wants to see in the development pipeline and continually evolve the functionality. Where it is a third party system there will be a selection and due diligence processes at the outset.
“The contracts we have with our vendors will include KPIs and service provisions and as our customers demand new functionality we work with these vendors to continue to build on the existing stack,” says Woodward.
In terms of innovation he refers to developments around new liquidity venues, algorithmic strategies, and technology to interact with that data. But he agrees that it will never completely replace human insight.
“At a general level, technology allows us to
Over the last two years we have spent time investing in transaction cost analytics, which enables us to analyse events and explore our universe data more effectively.
James Woodward, global head of State Street’s transition management business
operate more efficiently. It enables us to be able to interpret data more effectively but there is always going to be a healthy blend of human oversight – it is hard to automate the entire role of the transition manager.”
If we look at pre-trade analysis and the comparison of different execution strategies to help clients make informed decisions there have been some dramatic changes in the way transition managers run their businesses suggests Cyril Vidal, head of portfolio transition solutions, Goldman Sachs.
“Post-trade, from a reporting point of view we gather a lot of data and the way we are processing this data and using it to explain performance is also much improved,” he says. “All of this results in a much better outcome for clients and makes the actual work of the transition manager more efficient andcrucially - more interesting.”
But transition managers also have to be mindful that clients want simplicity and that if they gather too much information (or have too much data and are unable to articulate it and to present it in a simple way to the client) technology can become their enemy.
Looking ahead, there is a big push at Goldman Sachs towards visual structuring (additional features provided through Marquee, the bank’s digital platform for institutional clients).
“There are already some applications for this in foreign exchange and that could expand to other asset class and use cases, providing a better client experience where they can interact with the analysis they see,” says Vidal. “However, none of this will replace the role of the human transition manager to determine from all this data what is relevant.” Systems on the trading side are continually
on the largest contributors to risk at that level and combine this with the more macro-focused risk tools at our disposal.
evolving, as are the ways in which traders access liquidity. However, as far as transition management is specifically concerned it is the ability to drill down deeper into the contributors to risk that have seen an important step forward.
“We have always seen transition management as first and foremost a risk management exercise,” says Chris Adolph, director, customised portfolio solutions EMEA, Russell Investments. “Historically when assessing the risks in a transition, the focus had typically been on the broader macro risks such as regional deltas, country, sector or currency risk. Now we have the ability to look at contribution to risk at the security level, we can design a trading strategy that looks to focus on the largest contributors to risk at that level and combine this with the more macro-focused risk tools at our disposal.”
As the industry has seen volatility spike at various times over the last few years and expects volatility to be a continuing concern going forward, the ability to bring risk down early in the transition is key to minimising slippage from the mean cost estimate.
Now we have the ability to look at contribution to risk at the security level, we can design a trading strategy that looks to focusChris Adolph, director, customised portfolio solutions EMEA, Russell Investments
Market participants discuss the value of getting traders more closely involved in the transition process, obtaining their feedback on issues such as the pace of trading, how quotes should be sourced, and the best way to group trades.
One of the most interesting observations from last year’s roundtable event was the value of placing traders much closer to clients than ever before, pulling traders into client conversations and asking them question such as ‘if it’s a volatile day, are we slowing down the pace of trading?’ or ‘are we putting our trades into smaller baskets, getting a greater number of quotes and maybe changing which dealers we are getting quotes from?’.
Chris Adolph, director, customised portfolio solutions EMEA, Russell Investments observed that although the transition manager may be great at pulling resources together, as an expert on what is happening at the time the trader provides great insight.
“We have always involved the traders in the
transition process,” he says. “Their insight is particularly invaluable when assessing the actual liquidity of less liquid securities (often not captured well by models) and how we access blocks, use specialist dealers, or indeed just for their market insights.” As the company only acts in a fiduciary capacity, it can involve the traders at every step of the transition process without the client being concerned about information leakage. This is particularly important with less transparent asset classes such as foreign exchange or fixed income.
“As we only act in an agency capacity we also involve the traders directly in client calls before, during and after a transition has begun,” adds Adolph. “Their insights are always appreciated and we have only ever had positive feedback when they have been involved.”
Our people, access to liquidity, technology and experience across multiple asset classes help us to effectively navigate difficult and volatile market conditions for our clients. We’re stronger together.
When State Street is trading equities or fixed income as asset classes it also has zero ability to trade on a principal basis, so there is no conflict in terms of interaction with principal trading or in-house trading book explains James Woodward, global head of its transition management business.
“Our trading team are fully involved with the transition team and are often involved at the start of the project in terms of looking at liquidity profiles and providing input and insights in terms of strategy, market dynamics and market intelligence,” he says.
“During a trade they are communicating how we have been able to access markets and providing transaction costs analysis insights and comments for post-trades. Our clients appreciate the direct interaction with traders and that is normal for them, so I think it adds value.”
Sell side traders and their feedback are an important part of the transition process before, during and after the actual execution of trades. At Citi this stays ‘in-house’ rather than from multiple outside sources to minimise potential information leakage whilst still providing comprehensive insights into market liquidity explains Stuart Zanchi, senior multi-asset transition manager.
“Ultimately though the responsibility lies with the transition trader who has a holistic view of the project balancing all asset classes, regions and timing,” he says. “Clients differ on how close to trading they like to have visuals on, although generally they tend to take a step back once they see the team and project reporting in action and trust us, the process and transparency.”
The execution team - and in particular the data
they accumulate - allows Citi to address the core and tail risk of clients’ transitions. At the core of each transition, trade data enables the transition team to build a strategy based on forecasting the optimal strategy (% ADV) in the case of equities and duration and default risk appetite in the case of a fixed income transition.
“The successful implementation of a trade strategy based on our market data will enable us to complete on average approximately 90% of our transition,” says Andrew Orr, senior multi-asset transition manager at Citi.
“For the ‘tail risk’ phase (the remaining 10%) we will engage with the execution traders on a security-by-security basis, to identify appropriate clearing level, liquidity sources and execution timing. Incorporation of this direct market knowledge enables the senior transition project manager to minimise implementation costs and execution timing - both of which are essential for a successful transition result.”
Macquarie Capital has involved its traders in transition management exercises for some time and not just during the execution phase – they are involved right from the outset in terms of planning, to get their advice and enable them to opine on the trading strategy.
This is important because strategy is determined by factors such as current market conditions, investor sentiment, appropriate liquidity sources for a particular trade, and the venues or counterparties employed explains Paul McGee, head of portfolio solutions EMEA.
“Then we have to decide how we are going to maintain confidentiality, whether it is the sort of trade that we split into tranches,” he adds. “Input is important from traders who are close to markets and close to stocks, understanding where the best sources of liquidity are. So right
from the outset we would involve the traders and that helps to shape the trading strategy well ahead of time as to how we might tackle a project so there are no surprises when we do go live.”
McGee suggests it is comforting for clients to meet with the execution specialists who will be controlling the trade and to hear directly from them - the specialists on the ground – about what they are observing about markets and stocks and what might be the challenges in that particular event.
Traders are an intrinsic part of the transition process and always have been agrees Andy Gilbert, EMEA head of transition client strategy, BlackRock. “Their experience and insights are critical to the development and execution of any transition strategy. The key here is that everyone’s interests are aligned, there are no conflicts of interest, and everyone is working as a fiduciary to the client.”
According to Nick Hogwood, EMEA head of transition management at BlackRock, trader contact with the client has evolved from a nice-to-have to a must-have. With clients increasingly scrutinising venue and broker selection - and seeking assurance on how the transition manager safeguards the portfolio against information leakage - the trader now has much more direct contact with the client.
“Traders can be involved in either the early stage of the design of an execution strategy or throughout the project, but I think you have to keep in mind that they have a day job and this is not necessarily their role,” says Cyril Vidal, head of portfolio transition solutions, Goldman Sachs.
“I would almost flip this around and take the view that it is more the role of the transition manager to get closer to their traders and to be able to understand the constraints
Our trading team are fully involved with the transition team and are often involved at the start of the project in terms of looking at liquidity profiles and providing input and insights in terms of strategy, market dynamics and market intelligence.
these traders are operating under. So without necessarily stepping into the shoes of a trader, having an understanding of the parameters that an algorithm will use so you can really bridge the gap between what the client wants to achieve and what is possible and can be implemented by the desk.”
Clients may have different sets of objectives or specific constraints. Vidal reckons that if you put all these different constraints in front of the trader it could slow down the progress of the transition or be otherwise counterproductive or detrimental to the outcome.
“It is more important for the transition manager to understand the environment the traders are operating in rather than traders understanding what the transition manager wants to do, although both are actually important,” he says.
“Some clients will want to have direct access to the persons involved in the implementation of their trades, but more often what I observe is that clients just want to be able to talk to their transition manager and receive a comprehensive summary of feedback from the trading desk, whether that relates to market conditions, liquidity, or negotiation strategies.”
Global Investor looks at the key criteria for determining whether a transition is ‘complex’ – and the additional steps required to manage such transitions.
The range of events where institutional and professional investors - including asset managers - engage the services of the transition management community continue to expand in both size and complexity.
We have previously explored how complexity comes in a variety of guises: complex trading strategies, complex exposure management challenges, liquidity challenges, or operational stakeholder management in a significant platform change.
Complexity is particularly driven by whole of fund restructures across asset classes, emerging and frontier markets which drives
liquidity constraints to platform complexities across different beneficial owners – all of which contribute to trading, exposure and operational risks which need to be managed explains Ashish Patel, EMEA head of transition management at Citi.
“The primary value-add of transition managers is to act as a strategic partner with the client to understand the complexities, model various scenario analyses and provide an optimal solution tailor-made to the respective client,” he says.
Stuart Zanchi, senior multi-asset transition manager at Citi refers to the transition management mantra that every transition
is unique and adds that this plays out in determining complexity where multiple and often overlapping factors can add challenges to a project. Liquidity, value, asset class, skews, involved parties, market conditions and ownership structure are just some examples of these.
“A knowledgeable, experienced and trusted transition manager is required to oversee these factors, one that not only understands the potential pitfalls but can investigate and address any new obstacles,” he says. “We are seeing an ongoing trend from the more understanding clients engaging with their transition manager much earlier in complex projects and higher up the chain to help determine timing and project structure.”
There are many different criteria that could give rise to calling a transition complex. Not just size, but the blend of instruments and mandate types involved, the operational complexity of having to support multiple in specie transactions, the liquidity profile, and the account structure.
“Often we see multi account or multi custodian events, which leads into the number of stakeholders that are involved,” says Paul McGee, head of portfolio solutions EMEA, Macquarie Capital. “You could be dealing with multiple investment managers and custodians across a trading timeframe that could extend to weeks or even multiple phases lasting months, rather than a transition that is completed in a few days of trading.”
Tax considerations add to the complexitywhere there are many different jurisdictions and/or fund structures there are many different ways that tax (stamp duty and FTT) either applies or where exemptions could be applied.
“It is not unheard of to have events that include all of those criteria, which can be defined as extremely complex and adds to the length of time that you need to plan for an event,” says McGee. “It is also not uncommon to be planning a transition for months rather than just days or weeks, which impacts the resource commitment you need to make on these types of transitions and demands a highly experienced team.”
He suggests that defined contribution events are generally more complex because they have multiple stakeholders and additional considerations over and above a standard defined benefit transition.
According to McGee, the transfer of local authority assets into pooled vehicles usually falls into the bracket of being highly complex. More often than not they have many stakeholders and different mandate types being redeemed and rather than just the pooling provider being the client, there are many underlying clients to a pooling transition.
“A fund launch will generate a lot more lead time involving the regulator and involving who is going to invest and agreeing on a common date,” he adds. “So they generally
A knowledgeable, experienced and trusted transition manager is required to oversee these factors, one that not only understands the potential pitfalls but can investigate and address any new obstacles.Stuart Zanchi, senior multi-asset transition manager at Citi
have longer lead times and exhibit a lot of those characteristics that make them more complex.”
Outsourcing of the chief investment officer role is a major growth area for many transition managers.
“For us, it is just another client type to support and the same considerations apply as when we talk about pooling transitions or complex transitions,” says McGee. “They will generally be either launching a new fund or swapping out one set of asset managers for another, probably including a number of stakeholders and needing a lengthy planning period and potentially a lengthy implementation period. It is not game changing in terms of its nature, but it certainly falls into the more complex bracket.”
Each event is unique but there are certain elements that contribute to moving a transition event move up the complexity curve. The least complex deals are domestically focused, operating in a single market for domestic equities or fixed income. A little further up the curve is international equities, and moving up the curve a bit further are emerging markets and then global fixed income.
James Woodward, global head of State
Street’s transition management business suggests that the next level of complexity might be a multi-asset class deal. “The most complex types of deals that we undertake would be large multi-asset class, whole of fund type restructures or merger events,” he adds.
These are the fundamentals steps, but then there are extra dimensions and the first of these would be liquidity. If there is low liquidity in a particular asset class, that can cause it to move up the complexity curve. Some of the most complex transitions can be two-sided emerging market restructures and the reason for that is because there is complex scheduling and management of cash flow where markets have different cycles and rules.
“Another added dimension to complexity come when you are dealing with, for example, unit trusts or pooled vehicles versus segregated mandates,” adds Woodward.
Finally, the number of managers involved can add complexity. If on the legacy side there is just one manager and it is the same on the target side that is a lot easier than if you have 30 managers on each side.
Pooled events tend to be a little more complex when the assets are with a different custodian or there are issues with moving positions with a change of beneficiary ownership.
Complexity could refer to operational complexity (as was observed in the case of the pooling of the local government pension schemes in the UK) or structural complexity, for example if there was a need to move assets from one account to another and the order was too large or illiquid, raising the risk of market impact or not being able to complete a trade.
That is the view of Cyril Vidal, head of portfolio transition solutions at Goldman Sachs,
The most complex types of deals that we undertake would be large multi-asset class, whole of fund type restructures or merger events.James Woodward, global head of State Street’s transition management business
who notes that complexity also increases where clients have certain sets of objectives, perhaps where they want to absolutely control the cost of their transition or the timeline.
In this case it is necessary to talk to the client to help them understand what they need to let go of in order to achieve the overall best results.
“Outsourced chief investment officers would have a greater tendency to use transition managers than other investors because they are probably closer to their topics and more focused on performance,” says Vidal. “The fact that you have larger pots of assets run professionally and optimised is good news for transition managers.”
The outsourced chief investment officer is presenting itself as a new client type with very specific requirements, which requires the transition manager to develop new skills to handle the levels of complexity the client type presents, suggests Andy Gilbert, EMEA head of transition client strategy, BlackRock.
“There needs to be strong alignment between the transition manager and the outsourced chief investment officer - in any restructure, the transition manager is there to help fulfil the fiduciary obligations of the latter,” he explains.
The successful transition managers of tomorrow are those who can work alongside clients and their outsourced chief investment officer to manage change across the whole portfolio, rather than just a subset of assets, adds Nick Hogwood, EMEA head of transition management at BlackRock.
Generally speaking complexity comes with multiple asset classes, multiple managers, a larger number of stakeholders (both internal and external) and hedging or risk management requirements agrees Chris Adolph, director,
customised portfolio solutions EMEA, Russell Investments.
“The image below illustrates what constitutes a complex transition,” he says.
“A key requirement as events become more complex is a greater focus on project and risk management. We believe a single point of contact for the client - and all stakeholders during an event - reduces the risk of miscommunication, which is the biggest non-investment related risk in managing transitions.”
The growth of outsourced chief investment officers has led to an increase in potential transitions in the sense that a change in the management structure of a company or a fund often leads to a change in investment strategy and thus often to a change in investment managers.
“These events though are typically managed by the outsourced chief investment officer provider themselves and any subsequent changes they may make, rather than in the legacy state where the fund might put each of those events out to tender,” concludes Adolph.
PARTICIPANTS:
Amelie Labbe, Global Investor (chair)
Andy Gilbert, EMEA head of transition client strategy, BlackRock
Paul McGee, head of portfolio solutions
EMEA, Macquarie Capital
Ashish Patel, EMEA head of transition management & portfolio solutions, Citi
James Woodward, global head of State Street’s transition management business
David Edgar, director of transitions at Inalytics
Chris Adolph, director, customised portfolio solutions EMEA, Russell Investments
Cyril Vidal, head of portfolio transition solutions, Goldman Sachs
In early December 2022, Global Investor brought together the industry’s leading transition managers and consultants to discuss some of the key issues affecting clients including costs, the impact of interim solutions, the evolution of data analysis, and how business models are adapting to market conditions.
Amelie Labbe: How has geopolitical and economic uncertainty impacted clients over the last 12 months?
Andy Gilbert: Volatility remained elevated throughout the year across the majority of asset classes. It is during these periods of excessive volatility that there is a greater need for transition management to assist clients when they are undertaking change. If you don’t identify these costs and risks, how can you ever expect to manage them?
It is incumbent on the transition management industry to highlight risks and costs and identify how they can be managed, whether that is via hedging strategies or improved access to liquidity to trade more efficiently.
Ashish Patel: Clients who use transition management are typically very long-term
investors who can afford to be patient during times of volatility. So what we do as transition managers is to assist these clients to continually assess or validate how they think about these impacts of volatility on portfolio allocation, asset manager selection. What we have found this year more so than ever is that we are being engaged earlier in the investment lifecycle.
Clients come to us and ask ‘what does this portfolio structure look like’, ‘how can we reduce tracking error’, and ‘how can you guide us in the investment decision process’.
As Andy alluded to, we have to think about the opportunity cost, the access to liquidity amongst these restructures. What that further means is that when clients have a potential go live date, can we think about moving the goalposts?
David Edgar: A lot of clients are making changes for strategic reasons and in many ways, the political backdrop and global economic situation doesn’t necessarily change that. Much of the skill comes in taking the client through the transition experience without any surprises.
What is completely different is what happened in September and October this year in the DB pension world, and I am not sure we know exactly where that is leading, but I think there will surely be changes in 2023. I expect that pension funds are taking stock and thinking about what the future holds for them. There could well be new regulation around that, which would mean further changes.
Paul McGee: I would agree that what we have observed with heightened volatility is more of a requirement to handhold our clients, such as assisting them with ongoing assessments of current market conditions, and cost estimates. They are looking to us to advise them, for example, on whether they should phase their transition as opposed to going big-bang on one particular trading day. We have also seen a need for more regular communication, not only in the lead-up to transition but during the trading, perhaps talking to the client three or four times a day to assess conditions and whether we proceed on the planned participation rate.
Cyril Vidal: The sort of things I would really encourage the client to look at include ‘what flexibility can my provider give me’ and ‘can they show me some evidence of that’.
Chris Adolph: In periods of high volatility there can be a wider range around the mean cost estimate we give our clients, and that can be challenging if it moves dramatically away from that estimate. This is where communication becomes really important and also for clients
to understand how we propose to manage such periods.
James Woodward: The point about manager communication is important because we are seeing some of the stocks within model portfolios changing substantially, moving up to 10% in a single day. Communication in terms of whether clients want to maintain their weight in a particular stock, especially if it is a position that has been built over a number of days, is important to make sure the validity of the model is still there with the manager under the circumstances.
Amelie Labbe: Are clients becoming more cost conscious and have managers become better at explaining the value of the service and what they provide?
Cyril Vidal: It is about managing costs and reporting them. But more important is listening to what the client wants us to report and how they see cost internally and making sure we don’t deviate too much from that.
It is incumbent on the transition management industry to highlight risks and costs and identify how they can be managed, whether that is via hedging strategies or improved access to liquidity to trade more efficientlyAndy Gilbert, BlackRock
James Woodward: What we have seen with market volatility is greater variability in terms of pre-trade versus actual result. Typically, if the clients use an implementation shortfalltype benchmark it is not uncommon to see an overnight gap of 20 or even 30 basis points. There are some ways in which we can mitigate that overnight risk, but it really comes down to those markets - if you are trading the next day using a previous close benchmark, they are not available to trade because those markets are closed.
At the pre-trade stage we have done a much better job over the past five years as an industry in terms of outlining volatility. Many of us have used calendar heat maps to help guide customers in terms of particular days
where there may be an earnings release or an announcement from the Fed. However, sentiment is unpredictable.
David Edgar: James is making a key pointthere are only certain costs that a transition manager can control – and the definition of ‘cost’ in this context is also important. We call it costs because transition managers have this implementation shortfall benchmark, but the reality is a lot of it is actually portfolio performance and it is a measure of what is happening to the performance of portfolios relative to each other as you switch from A to B. Most of that, generally, is due to external market factors over which an individual transition manager has little control.
Ashish Patel: We’ve talked about transaction costs and market costs, but another element to consider is the most cost effective fund structure, how clients think about pooling funds to mitigate operational costs and have more streamlined structures.
It is up to us to explain the qualitative and quantitative drivers of cost and link them in a very easily digestible format to the client.
Paul McGee: We should remember that the value of a transition manager goes far beyond just cost reduction. So as long as the actions you have taken whilst managing the transition have been appropriate and suitable, the costs will be what the costs will be. There is much more to the value-add of employing a transition manager, such as taking away the operational burden from clients, and coordinating all the project stakeholders.
Andy Gilbert: I agree. What we are really talking about here is trying to preserve portfolio performance as we go through a transition, and what we are actually doing is estimating what that performance is likely to be.
That ability to estimate is influenced by many factors but I totally agree with Paul’s point. The value add of a transition manager isn’t just limited to preserving portfolio performancemanaging operational risk is just as important.
Amelie Labbe: How much of a role are interim solutions playing in the transition management space?
Paul McGee: We continue to see the need for interim solutions for a number of reasons. It may be that a client has had a manager on watch for underperformance for a period of time and has now decided to pull the trigger and terminate the mandate. However, they may not be there yet in terms of deciding who they are going to appoint or with the legal documentation, potentially even when they have identified who they would like to appoint.
Equally, we might see a so-called emergency exit situation where there may have been a team lift-out from an investment management house, the departure of key staff or a star fund manager, or even a corporate scandal where
It is about managing costs and reporting them. But more important is listening to what the client wants us to report and how they see cost internally and making sure we don’t deviate too much from that
Cyril Vidal, Goldman Sachs
the client has lost faith in the management of the firm they have appointed.
The ability to offer a temporary home for the mandate and buy the client some time to make an informed decision is very valuable. We can put that client into a safe, stable, low risk mandate of their choosing.
Chris Adolph: We had an example of team lift-out this year where a client had literally just gone through the process of hiring a new manager and allocating a large amount of money into emerging market debt. The manager was only in place for a month and a half when the whole team was lifted by another asset manager.
Within a week or so we were having a
conversation about transition because we had pitched for the original event and the client came back and said they now needed something else.
This process can be relatively quick, but if you have to do other things like go through an onboarding due diligence process, you are having to squeeze due diligence that might normally take months into a very short period. I think we went from having a conversation to looking at transferring assets within a month, including a due diligence visit.
What you tend to do is a number of different scenario analyses to find what suits - some clients might want to go almost completely passive, others will take the view that there is no point since they taking all that risk off and
then going to have to transition again into a new portfolio. What works for the client is key and transaction costs often sit right in the middle of that.
David Edgar: This is one of the reasons why we suggest that clients set up a panel of transition managers. If they do find themselves in this situation, they can move quickly - if they have the panel in place, they can just pick up the phone and get it done.
Andy Gilbert: We have occasionally seen clients that have looked at the tracking error tolerances of their mandates and have wanted to reduce them. The key factor here is that the interim management proposition is suitable for the client’s needs.
Prior to undertaking the assignment, it is just as important to explain to clients what interim management is and what it is designed to do as what it isn’t. Essentially, it is just a bridge to manage exposure until they’ve found the most appropriate home for those assets going forward long term. You are putting guardrails around the portfolio that meet an investment objective that that client has, and that objective can change.
The landscape is changing and complexity is increasing in the context of interim management. For example, in some European jurisdictions sustainability requirements have appeared, adherence to SFDR regulation is mandatory and the reporting that goes with it comes into play.
There is no plug-and-play approach here, you really have to work with your client in advance to fully understand their exposure objectives and have the in-house capabilities to support that, whether it be through reporting, monitoring, adherence to regulation, etc.
Chris Adolph: That regulation point is important. It is sometimes why not everyone offers interim because if you think of your typical transition and how you manage it (and with some of that reporting in the guidelines) we have a very limited discretion on what we can do. In interim we are selecting the portfolio and how we construct it, acting much more like an asset manager, so the onus on us becomes much more like that of an asset manager than a transactional exercise.
It is up to us to explain the qualitative and quantitative drivers of cost and link them in a very easily digestible format to the client
Ashish Patel, Citi
It can add up to a lot of monitoring and if you are only going to be managing for a couple of months you might ask whether you want to go through all that reporting.
James Woodward: I think one of the applications of interim that we have seen this year is in the context of asset allocation. Significant negative returns in some asset classes have caused asset owners to think they need to rebalance.
When rebalancing, there might be a particular asset class where the asset owner needs to implement a temporary tilt or beta exposure until they can find a more permanent home for an exposure. We have often undertaken research to examine the types of benchmarks clients are looking at and the tracking error that was mentioned before to find the best solution until they can suitably apply those monies down to a long term manager.
Cyril Vidal: I view the transition manager like a toolbox. We have the ability to provide execution, the operational capability with having the authority on an account that has custody, and we also have a structuring mindset where we can come up with some bespoke reporting.
There are many occasions where this skillset is probably not necessarily well known to our clients and sometimes we find situations where they didn’t intend to appoint a transition manager for a specific situation but we have been able to take something off their hands to solve for complexity because we used part of that toolbox to find a solution to their problem.
David Edgar: That is a great point - the breadth of knowledge that sits within a transition team is quite exceptional because
they have to cover every asset class, the back office, middle office and the front office.
James Woodward: I often think of an asset owner having a transition management agreement in place as a bit of an insurance policy. In all these situations we have described the interim service can be that stop gap if they need an emergency set of exposures implemented. It really is a value add, a necessary piece in the armory of an asset owner.
The ability to offer a temporary home for the mandate and buy the client some time to make an informed decision is very valuable
Paul McGee, Macquarie Capital
Amelie Labbe: In what way is the industry evolving to meet the demands and requirements of the ESG transition?
Andy Gilbert: Before we look at how the industry is evolving, I think we should spend some time thinking about how ESG is evolving. The first evolution focuses on sustainability considerations. We have seen clients thinking about how this philosophy can extend to their whole portfolio and asking how they can think about sustainability and ESG, not just across their equity portfolio but across their fixed income assets - credit, high yield and emerging market debt portfolios.
ESG as a concept is still evolving in the minds of clients. In the past, adopting ESG may have simply meant excluding certain sectors or securities and certain indices were constructed to address that. At a point in time, clients may have been thinking low carbon. More recently, the focus has been around net neutral/ Paris Aligned with benchmarks, portfolios and strategies designed to reflect that. This demonstrates how ESG has been evolving in the minds of clients. But what does that mean
from a transition management perspective?
It has become increasingly important for the transition management industry to provide the right level of support to ESG transitions, whether that is providing insights on factors, the impact of different benchmarks, or scoring.
We also need to be on top of regulatory requirements. The ability to implement governance structures will continue to be critical: for example, coding restricted lists, and the correct interpretation and implementation of client guidelines. We need to be able to put a framework around the portfolio.
ESG isn’t a one-size-fits-all and the transition management industry needs to be flexible in tailoring and customising its approach.
David Edgar: I don’t see ESG suddenly resulting in a massive transition. I think a lot of asset managers will move their portfolios to their new benchmark, whatever it may be. I am sure we will see lots of new funds launching and assets moving from old funds to new funds, but I don’t see any massive uptick in transition work over the next two years due to ESG although it will be another thing for transition managers to have to think about and deal with.
I often think of an asset owner having a transition management agreement in place as a bit of an insurance policy
James Woodward, State Street
Chris Adolph: I was going to ask around the table in terms of whether people had seen clients asking for specific ESG reporting, because as Cyril points out we are producing the portfolio of their target manager, so the end result is a manager who has constructed something in line with what the client might get.
During that journey we are moving closer to that portfolio all the time so it is a question of what is our role here, other than to deliver what the client has already agreed with the manager. I think it is a review of the exclusions and (especially if you are dealing in funds in Luxembourg) various regulations. The evolution of the systems that we use really helps here in terms of coding and making sure we can
manage all of those exclusions on a real time basis.
David Edgar: There has been some discussion about whether if everyone is moving in the same direction and having to sell the same stocks and buy the same stocks we see trading anomalies within the market, but I’m not aware that there is anything obvious happening there.
Chris Adolph: Consider how many years we have been talking about ESG. When those conversations were happening from an asset management perspective it was all a question about clients, what potential alpha are you giving up by doing this because potentially you are forcing your pension fund to make
changes based on certain criteria. It was then a question of are we giving something up? Now the conversation isn’t about what you are giving up, it is about constructing portfolios that people believe are going to outperform going forward.
Ashish Patel: We are almost entering this period of ESG 2.0 in terms of redefining and reclassifying funds. Just this week we have seen Article 9 designation being removed from about $125 billion of assets under management.
For us as transition managers it is about identifying what are ESG transitions, as
David said, and it can quite quickly become a momentum trade, so we have to be very conscious of the sector biases, those signature names within certain ESG portfolios that can cause liquidity constraints.
When you get down to that level of idiosyncratic risk it becomes very difficult to hedge and transition from legacy to target, so that is where the value add is as transition managers, using our skillset and knowledge base as we apply it holistically to portfolio and risk management, but through a more specific lens with ESG.
Paul McGee: I agree with that point entirely. We have helped a number of clients with ESG fund launches in the past year and the common theme is highly concentrated portfolios and putting big positions into single stocks that can be very volatile. So you need to have a carefully designed trading strategy and look at your biggest risk contributors. Some well-known stocks that feature regularly in ESG portfolios can move 5%, 10% or even 15% on any given day and 30-stock global, highly concentrated portfolios are common theme.
Amelie Labbe: Is the transition management industry fully realising the value of data?
James Woodward: Transaction cost analysis and the use and application of data has advanced significantly over the last three to five years. Historically, TCA has been strong in the equity space with a good set of vendors and that has extended to fixed income, foreign exchange, and exchange traded derivatives.
It is important to understand the quantum of data that we are talking about for each transition event. In the equity space, hundreds
I am sure we will see lots of new funds launching and assets moving from old funds to new funds, but I don’t see any massive uptick in transition work over the next two years due to ESG
David Edgar, Inalytics
of individual orders can actually result in thousands of orders and tens of thousands of fills. It is those fills that are a result of people using algorithms and smart order routers to acquire and distribute orders to where liquidity is strongest and analysing that data is key.
For the client it is used to provide transparency, a third party lens into the transition data that enables the client to see items such as performance and attribution. It can also be very useful to drill down into a very granular level of detail where there might be a single stock in a particular transition that drove the overall outcome of events.
The client may be able to get a detailed understanding of participation, stock performance before and after trading, reversion,
particular algorithmic strategies that were used by the transition manager and the counterparty used, even down to gauging the level of signaling risk and whether the algorithm was deemed to be having too much market impact. Moving away from a specific client event, transaction level data becomes more meaningful when it is examined over a longer period of time and spans a number of events. That particular data set can be used by a transition provider to analyse whether an algorithm or a particular counterparty is more or less effective than alternatives. It can be useful in assessing participation levels across different markets and to help improve future outcomes or future strategies that have been generated.
Transaction cost analysis can also help assess trading team performance, and individual trader performance.
Ashish Patel: Data has very quickly become the most valuable commodity in our industry aside from human capital. In a transition we get data from various sources - whether it be the investment manager or the custodian – and also generate much of it ourselves, whether it be for the purpose of transaction cost analysis or defining trading strategies at the outset. It is our job to know the client and how much data we present that makes sense whilst being transparent. It is about converting potentially hundreds of thousands of lines of data into an easily digestible format.
It is hard to talk about data and analytics without thinking about the new wave of machine learning and evolution of algorithms. This can be divided into four pillars, the first of which is client intelligence - how we can better understand or use data to understand what our clients want from us and deliver that service in an ever-evolving complex world.
The next pillar is market intelligence, how we can use that data to create more efficient trading algorithms. The third pillar is automation and we have talked about how we can create operational efficiencies and mitigate operational and project management risk, which is within our control, as opposed to execution risk or market risk. The fourth pillar is supervisory intelligence - how can we use
that data to protect ourselves and our clients to ensure that we uphold the highest level of fiduciary obligations during the transition?
David Edgar: Transaction cost analysis in itself has limited value for each individual transition because as James pointed out, the value lies is looking at lots of trades where you are doing the same thing over and over again. But for all the people working at trading desks, who are monitoring their daily trades and using it to constantly improve their systems, processes and algos it is invaluable.
Can you look at the minutiae of the orders in a particular transition and draw too many conclusions from that as it relates to that transition? Possibly not, because you are often required to trade in a particular way due to external factors. You have to start with the macro strategy and work down and providing you have got your strategy right at the top level, everything else should follow. However, transaction cost analysis is key for trading desks to improve their processes.
James Woodward : About 80% of a good transition post-trade report is attribution at the parent level - high level attributions, starting at sectors and countries and then moving down to the stock level. It is only probably a subset of that post-trade report that warrants diving down into the individual transaction cost analysis for a particular stock, although if there are those outliers it is obviously important to be able to provide that level of detail should the customer be interested.
It also very much depends on the sophistication of the customer. You can’t go and dump 20,000 securities on a customer and expect them to know what to do with it - they need the right views and lenses that some of the transaction cost analysis vendors can provide.
Chris Adolph : One of the key evolutions of data is that we are able to drill down much more into the component parts of risk in a portfolio. An example would be looking at very stock specific risks - so instead of just looking at whether you are overweight Russia vs Germany, for example, you can drill down to whether 5% of the total risk in the whole transaction is this particular name.
Andy Gilbert: Data for the sake of data does not deliver much to a client – what they really want are insights into how the markets and execution came together to give us the outcome we got. Data can help, but are they going to be able to derive conclusions from it? Maybe not. That is where we help them understand what the data means and what insights they can draw from it.
Cyril Vidal: I think I was the first to mention around this table a few years ago the electronification of fixed income. We see far more diversified, granular portfolios which brings another challenge around data - how do you synthesise all the information about liquidity of particular bonds into a single number that you can present to the client and evaluate the transaction cost accordingly?
Amelie Labbe: How are business models likely to adapt to market conditions over the next year or so?
Ashish Patel: We have talked about business models, not necessarily discussing brokerdealer versus asset manager in the transition management space. For all of us here, it should be centered around the business model that focuses on our fiduciary level obligation, our
level of care, which essentially ensures that the oversights that have been placed upon us during the transition are constantly aligned to the ever-evolving needs of the client, ensuring that our service delivery as a transition manager is always aligned.
Andy Gilbert: Complexity is on the rise, whether that is the increase in assets on platform-based strategies or whether pooling is going to exist beyond local government pension schemes and into defined benefit schemes.
We are looking potentially at whole portfolio changes, not just changing some equity managers or an allocation to fixed income. I think whole portfolio change is going to be an increasingly dominant theme not just for 2023 but beyond.
Other themes that we have already discussed, such as ESG, are going to continue. I foresee increased scrutiny on transparency and governance around the discretionary decisions that transition managers are making, which is a positive development.
When I consider business models I think similar to Ashish. How does this industry need to evolve, pivot and adapt to take on the challenge of clients moving towards? How can we build the expertise of our teams to meet those increasing complexities and changes?
Transitions can no longer be thought of as just a trade. We have all talked about the other benefits that transition management can provide to a client, as well as execution. It is around managing that complexity, anticipating clients’ future needs.
David Edgar: We have seen years, and will continue to see years, of consolidation within the asset management and pension worlds. Pooling within pensions will become a bigger theme, possibly as a knock on from what has happened this year, particularly among the smaller schemes. We are not quite sure what is happening with superfunds yet.
What is required is flexibility. Coming back to what Cyril said before about the toolkit and what I said about the fact that if you
I think 2023 will be a big year for major strategic asset allocation changes, especially in the pension fund industry. That could lead to a lot of activity, not just as a transition, but overlay activity as well
Chris Adolph, Russell Investments
want a one-stop shop to solve a problem, it is a transition manager because they have the expertise and they continue to evolve.
As an example, it’s the knowledge of pooled funds, the way they work, what can be done in them and what each regulatory environment involves. Transition managers are quick to evolve and they just need to continue to do that because the environment continues to change. It’s changed every year I’ve been doing this and it’s going to continue to change. Transition management teams have done a very good job over the years of keeping up to date with change.
for major strategic asset allocation changes, especially in the pension fund industry. That could lead to a lot of activity, not just as a transition, but overlay activity as well.
The fiduciary point is about putting clients first, which we have always done whether we are acting in a trading capacity or an asset management capacity.
We recently conducted a survey with JPES Partners, who reached out to institutional investors to ask them what they think their biggest challenge is going to be in 2023. The number one challenge highlighted in the survey was volatility, so it is up to us to ask them how we are managing that volatility and come up with solutions.
Beneficiaries and investors are increasingly demanding exposure to ESG strategies across their public equities portfolios. Switching mandates or launching funds into a crowded market is fraught with risk and should be carefully managed.
Driven by a combination of client demand and regulatory impetus, fund managers are increasingly adopting investment strategies that incorporate environmental, social and governance (ESG) factors. Bloomberg estimates that by 2025, ESG assets are likely to exceed $53 trillion, accounting for more than a third of global assets under management.
As a result of this multifaceted demand, the transition management landscape is increasingly complex with heightened activity across both retail and institutional markets. Many investors - including corporate and government pension funds, sovereign wealth funds and high net worth individuals
- are channelling more of their portfolios into mandates pursuing ESG strategies while at the same time, investment management firms are developing new ESG funds to meet additional demand.
However, switching mandates or launching funds in such a crowded market is complex and risky: managed badly, either process can result in unnecessarily high costs, hitting initial performance and inflicting reputational damage.
For asset owners, any switch of mandate is logistically difficult. Careful coordination is needed to maintain exposure to the markets in which it is invested and to avoid excessive costs. Managers who lose mandates might not prioritise trading out of positions carefully to ensure the best outcomes for their outgoing clients and this can result in them exiting large positions too quickly – signalling their intention to other market participants, causing prices to move against them and thus increasing costs. Similarly, investment managers launching new
funds can face timing issues, with the need to invest client seed money in a tight timeframe. The investment manager needs to be able to deploy capital quickly to establish market exposure almost immediately. Failure to do so can create a drag on performance against the benchmark that can be difficult to overcome.
These challenges can be exacerbated by the nature of some ESG strategies. They often identify a subset of issuers which score highly on various ESG characteristics such as climate risk management, employee relations, or the diversity of their boards or workforce. Consequently, such strategies tend to be more concentrated than strategies that invest across entire benchmark indexes.
This concentration risk can have major ramifications. Electric vehicle manufacturer Tesla, for example, has grown so rapidly that it accounts for approximately 11% of FTSE Russell’s ET50 index of the 50 leading global environmental technology companies, and has become the fourth largest weighted company in the S&P 500 Index.
For many ESG strategies, Tesla is a significant holding, meaning that moves in its share price can have a major impact on strategies’ performance.
Furthermore, trading into these volatile ESGrelated stocks in the first instance leaves fund managers susceptible to market moves on the way in. This leads to many funds overpaying for exposure to the market, dampening initial performance.
It is for these reasons that we are seeing a growing number of managers using our transition management service, supported by Macquarie Capital’s multi-asset trading desks. Our service aims to minimise costs and
maximise fund performance, with centralised management of all stakeholders in a transition, detailed trade analysis and full project management.
By enabling a holistic view of a fund’s transition, clients using the service can understand which assets can be retained from the previous portfolio to the new one, helping to reduce trading and minimise cost.
They can maintain market exposures and minimise performance holidays and, by accessing our risk management capability, manage the volatility and market impact that can be associated with specific ESG names.
to our capabilities:
“We are very happy with our decision to use Macquarie Capital’s transition management team to launch new mandates for our sustainable equities portfolio,” says David Cox, deputy chief investment officer at Brunel Pension Partnership. “They made the process as smooth as possible, co-ordinating the multiple stakeholders involved and designing sophisticated trading strategies to minimise costs and risks. Our clients were very happy it would support the portfolio as it invests in companies that provide a tangible benefit to society.”
The adoption by the investment market of ESG-orientated strategies is not without its controversies and differences of opinion, with live debates underway as to how ESG investing should be defined and how best to address greenwashing.
Nonetheless, a process is firmly in train by which ESG factors are increasingly becoming integrated into investment management, and asset owners and managers are responding. As they do so, they need to approach fund transition and new launches with focus, discipline and careful coordination.
As long as transition management has been around there have been clients asking their transition managers to do more than just transition portfolios. The transition manager has extensive trading, operational and project management skills, but at its core we still see transition management as primarily a portfolio management exercise.
After appointing a manager to a new active emerging market debt mandate, the whole of the asset manager’s EMD team was taken over by another asset manager.
Not wanting to leave the mandate with the outgoing team, the client contacted Russell Investments for an interim solution while they did a new manager search.
We were able to agree terms, and complete legal and operational set up, complete with full due diligence, all within six weeks. Portfolio was restructured to a lower risk target and managed on an interim basis for five months.
As such, it is no surprise when clients approach us asking for advice on what alternatives are available to them if they need to exit an existing investment
or manager, but have not yet finalised what will take their place.
There are many reasons why a client might need to exit a manager and performance is often not the principal one. The one commonality for choosing an interim solution is the desire to manage risk while in that transition stage to a new manager (which can take many months) – and if costs can also be minimised during the process that is an added benefit.
In the case study below we outline the challenge one client faced when, having just
error target of < 50 bps +/- 25 bps
Cost Efficiency: Realised costs came in at ~25 bps during a volatile EMD market
“We were very pleased with the management by Russell of the interim portfolio. As this was our first experience with interim management, we had a few start up challenges. However, once they had been adequately solved and the interim mandate was live, we could fully focus on selecting a new ‘permanent’ manager. Russell remained proactive during the management of the interim mandate and were able to provide the reporting we needed.”
awarded an emerging market debt (EMD) mandate to two managers (after an extensive search and due diligence process), one of the manager’s entire EMD team was poached by a competitor.
1st September 2022
Russell Investments commence transition into interim
We were able to onboard the client from initial meeting in just over a month this included due-diligence and custom reporting preparation
Unwilling to leave the assets with the existing manager, the client approached us to discuss potential interim solutions. Their requirements included reducing risk, minimising turnover (and thus cost), managing to a specific exclusion list, and providing comprehensive reportingincluding certain bespoke ESG requirements.
After a thorough, but swiftly implemented contracting and due diligence process on Russell Investments, guidelines and reporting were agreed and the exiting manager’s portfolio rebalanced to a new lower tracking error target.
Clients might choose to use an interim manager for a host of different reasons, but risk management is usually key. However, over and above this, it enables the client to focus on their new manager search and demonstrates to their own stakeholders that not only have proactive steps been taken to manage risk at the total portfolio level, but also that during this interim stage manager fees have been controlled as the active manager fee is replaced by a more passive interim fee.
This material does not constitute an offer or invitation to anyone in any jurisdiction to invest in any Russell Investments Investment product or use any Russell Investments Investment services where such offer or invitation is not lawful, or in which the person making such offer or invitation is not qualified to do so, nor has it been prepared in connection with any such offer or invitation.
Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.
31st January 2023
Russell Investments handover interim portfolio to new manager
Thereafter the portfolio was monitored and reconciled regularly and the tracking error kept within the bounds agreed upon. Once a new manager had been appointed and their due diligence completed, the portfolio was handed over.
The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.
Any forecast, projection or target is indicative only and not guaranteed in any way.
Issued by Russell Investments Implementation Services Limited. Company No. 3049880. Registered in England and Wales with registered office at: Rex House, 10 Regent Street, London SW1Y 4PE. Telephone 020 7024 6000.
Authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London E20 1JN. ©1995-2023 Russell Investments Group, LLC. All rights reserved.
Consolidation amongst asset owners and insurers has been driven by regulation, market opportunities and the search for greater economies of scale. For decades, State Street has provided clients with solutions to support efficient and risk controlled merger events, thereby enabling their success.
s an industry veteran, we highlight key challenges and factors to be considered before, during and after a merger or consolidation.
AAs an industry veteran, we highlight key challenges and factors to be considered before, during and after a merger or consolidation.
Mergers present a multitude of risks and challenges, which involve varying levels of interaction across event speci factors such as changes to investment managers, asset allocation, target operating model, technology platforms, data management, governance, internal management, people, culture, timing, tax and impact to existing members
Mergers present a multitude of risks and challenges, which involve varying levels of interaction across event specific factors such as changes to investment managers, asset allocation, target operating model, technology platforms, data management, governance, internal management, people, culture, timing, tax and impact to existing members.
When planning a merger event, good strategy provides a solid foundation for implementation. However, vigilant management and execution of the plan is equally important. Factors such as vague or missed communications, lack of understanding of the timing of exposure shifts or stakeholder responsibilities, change of plans mid transition and lack of coverage can have adverse e ects – which is why funds look to external providers such as State Street to manage their merger events.
When planning a merger event, good strategy provides a solid foundation for implementation. However, vigilant management and execution of the plan is equally important. Factors such as vague or missed communications, lack of understanding of the timing of exposure shifts or stakeholder responsibilities, change of plans mid transition and lack of coverage can have adverse effects – which is why funds look to external providers such as State Street to manage their merger events.
stakeholders’ collaboration are critical steps toward understanding pre- and post-merger objectives that help to clearly define roles, responsibilities and expected timeframes
stakeholders’ collaboration are critical steps toward understanding pre- and post-merger objectives that help to clearly de ne roles, responsibilities and expected timeframes
Extensive planning and stakeholders’ collaboration are critical steps toward understanding pre- and post-merger objectives that help to clearly de ne roles, responsibilities and expected timeframes. This sets a solid foundation for building trust, understanding where accountability lies and establishing clear communication channels. ( gure 2)
Extensive planning and stakeholders’ collaboration are critical steps toward understanding pre- and post-merger objectives that help to clearly define roles, responsibilities and expected timeframes. This sets a solid foundation for building trust, understanding where accountability lies and establishing clear communication channels. (figure 2)
It is critical to understand existing portfolio exposures and structures in which investments are held, including the percentage of listed versus unlisted assets and the mix of assets in pooled versus segregated accounts. (Figure 3)
It is critical to understand existing portfolio exposures and structures in which investments are held, including the percentage of listed versus unlisted assets and the mix of assets in pooled versus segregated accounts. (Figure 3)
Once stakeholder input is collected, it is important to identify and account for factors that may impact the target timeframe and create a detailed plan This is circulated across stakeholders for veri cation of accuracy and ensuring awareness of stakeholder roles at various stages. Plans are re ned as new information presents or circumstances change.
Once stakeholder input is collected, it is important to identify and account for factors that may impact the target timeframe and create a detailed plan. This is circulated across stakeholders for verification of accuracy and ensuring awareness of stakeholder roles at various stages. Plans are refined as new information presents or circumstances change.
Preserving portfolio value and maintaining desired market exposure are fundamental goals of a restructure. Achieving these requires the ability to move assets in a risk controlled manner while accessing a wide range of liquidity to support best execution.
Preserving portfolio value and maintaining desired market exposure are fundamental goals of a restructure. Achieving these requires the ability to move assets in a risk controlled manner while accessing a wide range of liquidity to support best execution.
Complexities often arise due to the number of stakeholders, the extensive planning required and the volumes and movement across multiple asset classes (often in a condensed period of time). This occurs whilst the fund maintains other functions in a ‘business as usual’ state.
Complexities often arise due to the number of stakeholders, the extensive planning required and the volumes and movement across multiple asset classes (often in a condensed period of time) This occurs whilst the fund maintains other functions in a ‘business as usual’ state.
Our client partnerships are built on confidence in our core competencies which include:
Our client partnerships are built on con dence in our core competencies which include:
• Multi broker agency model – We provide access to multiple counterparties, which is essential to achieving best execution,
• Multi broker agency model – We provide access to multiple counterparties, which is essential to achieving best execution,
particularly where size and liquidity constraints exist.
particularly where size and liquidity constraints exist
• Industry leadership – Our decades of experience in planning restructures and communicating across custody, registration, tax, asset allocation, risk management, exposure management and execution positions us as an industry leader. We have successfully executed US$210.8 billion of merger and whole of fund events between 2008 and 2022.
• Industry leadership – Our decades of experience in planning restructures and communicating across custody, registration, tax, asset allocation, risk management, exposure management and execution positions us as an industry leader. We have successfully executed US$210.8 billion of merger and whole of fund events between 2008 and 2022
• Technology – Our significant investments in multi-asset class risk, order management, execution management and investment accounting platforms helps manage complex restructure events.
• Technology – Our signi cant investments in multi-asset class risk, order management, execution management and investment accounting platforms helps manage complex restructure events.
• Transparency – We utilize multi-asset class transaction cost analytics vendors, providing transparent insights into the quality of execution outcomes.
• Transparency – We utilize multi-asset class transaction cost analytics vendors, providing transparent insights into the quality of execution outcomes
Cyril Vidal
Head of Portfolio Transition Solutions
– Executive Director
Tel: +44 (0) 20 7051 2163
Email: cyril.vidal@gs.com
Group Email: eq-ln-tmg@gs.com
Goldman Sachs has been a provider of transition management services as a part of its broader pensions and insurance franchise for over 40 years. The firm established a dedicated transition management team in London in 2000 and has been an active provider of services ever since under a ‘broker model.’
Our Portfolio Transition Solutions Group consists of a team of specialists comprised of Transition Strategists, Portfolio Strategists, Execution Coordinators and Operations. Our approach that involves multiple specialists within GSI ensures that clients benefit from the best practice know-how and service Goldman Sachs has to offer along every single step of a transition trade.
Goldman Sachs’ transition team has access to a wide range of sources of liquidity, externally with access to multi-broker and internally through our trading desks and the support of our sales franchise. This unrivalled set-up gives us the ability to design and implement strategies that best fit our client’s risk and cost objectives.
Our team has been at the forefront of product innovation, designing best-in-class risk management techniques to solve for transition needs or leveraging on Goldman Sachs infrastructure for providing pre- and post-trade analytics and increased transparency in executions.
9th Floor, Corinthian House, 17 Lansdowne Road, Croydon, CR0 2BX
Anthony GrocottDirector of European Distribution
Tel: +44 (0)20 3675 2908
Email: agrocott@inalytics.com
Inalytics ensures that your objectives are being met and your investments are protected during a transition. The need for independent scrutiny in the transitions industry has never been more acute. Inalytics scrutinises and verifies the actions of an appointed transition manager to ensure a satisfactory conclusion for our client. The three phases of our engagement are:
Before: Independent, empirical scrutiny of potential transition managers’ proposals to help you understand their implementation strategy. We critically assess their previously completed transitions to reveal their level of skill.
During: Expert monitoring during the transitions event to ensure that any potential disruptions to completion are quickly identified and mitigated.
After: Clear and objective reporting which verifies the implementation shortfall and provides a critical assessment of the transition manager’s performance.
Global Locations:
Boston, London, Frankfurt, Singapore, Sydney, Tokyo
State Street Financial Center, One Lincoln Street, Boston, Massachusetts 02111
Dan Morgan
Global Head of Portfolio Solutions
Tel: +1 617 664 8879
Email: dmorgan@statestreet.com
James Woodward
Global Head of Transition Management
Tel: +61 2 8249 1248
Email: jrwoodward@statestreet.com
Michael Putica
Head of Client Solutions, Americas
Tel: +1 949 932 1446
Email: mputica@statestreet.com
Clare Marlow
Head of Client Solutions, Asia Pacific and Middle East
Tel: +61 400 968 074
Email: cmarlow@statestreet.com
State Street Corporation (NYSE: STT) is one of the world’s leading providers of financial services to institutional investors including investment servicing, investment management and investment research and trading. With $36.7 trillion in assets under custody and/ or administration and $3.5 trillion* in assets under management as of December 31, 2022. State Street operates globally in more than 100 geographic markets and employs approximately 42,000 worldwide. For more information, visit State Street’s website at www.statestreet. com..
*Assets under management as of December 31, 2022 includes approximately $59 billion of assets with respect to SPDR® products for which State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely as the marketing agent. SSGA FD and State Street Global Advisors are affiliated.
The Portfolio Solutions group within State Street Global Markets supports investors by delivering multi-asset outsourced agency trading and risk management services through an experienced global workforce and resilient infrastructure. The group provides transition management, exposure and interim management, and outsourced trading solutions, each offering institutional investors opportunities for improved operational and cost efficiencies.
Services: Transition Management, agency execution and brokerage, outsourced trading, currency management, exposure management.
Macquarie Capital (Europe) Limited
28 Ropemaker Street, London EC2Y 9HD
Paul McGee
Head of Portfolio Solutions, EMEA
Tel: +44 203 037 5655
Email: Paul.McGee@macquarie.com
Mick Larkin
Portfolio Solutions ANZ and APAC
Tel: +61 2 8232 0639
Email: Mick.Larkin@macquarie.com
Kevin Byrne
Portfolio Solutions Americas
Tel: +1 212 231 2477
Email: Kevin.Byrne@macquarie.com
In unpredictable markets, how you respond to change makes all the difference. Macquarie Capital’s awardwinning Portfolio Solutions team can help you navigate change with confidence, providing deep expertise in managing the risks and costs of asset allocation, transition management and portfolio restructure.
We partner with our clients over the long-term to offer an end-to-end project management and execution service, from detailed planning and reconciliation of trading, through to comprehensive reporting and ongoing engagement. Clients are reassured by our commitment to transparency, receiving a tailored, comprehensive suite of reporting that helps ensure decisions are backed by real insights.
Our experienced regional teams leverage the technology of our custom-built transition management platform PILOT, to offer clients innovative transition solutions. With bases in London, New York, Sydney and Singapore, and a 24-hour global agency trading platform, our connectivity to markets and investors allows us to achieve optimal solutions in each asset class.
Citigroup Centre, Canada Square, Canary Wharf, London, E14 5LB, United Kingdom
Ashish Patel
EMEA Head of Transition Management
Tel: +44 (0) 20 7500 1298
Email: transition@citi.com
William Cobbett
Americas of Transition Management
Tel: +1 212 723 4181
Michael Jackett-Simpson
Asia Head of Transition Management
Tel: +613 8643 9779
Citi is a leading global financial services company and a pioneer in the Transition Management industry for over 30 years. Our philosophy is to act as a trusted, strategic partner in a fiduciary capacity to ensure our purpose is fully aligned to that of our clients. We deliver innovative portfolio solutions to the world’s largest sovereign wealth funds, pension funds, insurance companies and asset managers.
Our bespoke services specialise in mitigating costs, managing risks, and ultimately preserving the value of assets whilst in transition. With dedicated transition managers in London, New York, Singapore and Sydney, and local markets trading presence in over 60 countries, our agency trading platform has unrivaled access to liquidity across global equities and fixed income. Combined with our expertise in project and operational risk management, CitiTM is often selected a transition manager in the most complex transitions across developed and emerging markets.
CitiTM’s award winning service across transition management and portfolio solutions is the one-stop access point to Citi’s global platform. We are here to help at every stage of the investment life cycle with transparency at the core of everything we do.
Chris Adolph
Director, Customised Portfolio Solutions, EMEA
Tel +44 (0) 20 7024 6335
Email CAdolph@russellinvestments.com
Russell Investments is a global investment solutions partner, dedicated to improving people’s financial security. Russell Investments offers actively managed multi-asset portfolios and services that include advice, investments and implementation.
Russell Investments has £229.8 billion in AUM and as a consultant to some of the world’s largest pools of capital, Russell Investments has £0.8 trillion* in Assets Under Advice. In 2022 we traded over £1.8 trillion across all asset classes, including equity, fixed income, foreign exchange and derivatives and managed 133 transition events representing £61.6 billion, all through its Customised Portfolio Solutions business.
Data at 31.12.22 unless otherwise stated.
* Data as at 30.06.2022
12 Throgmorton Avenue, London, EC2N 2DL
Nick Hogwood
Managing Director
Tel: +44 20 7743 4966
Email: nick.hogwood@blackrock.com
55 East 52nd Street, New York, NY 10055
Paul Francis
Managing Director
Tel: +1 212 810 3637
Email: paul.francis@blackrock.com
Twenty Anson, 20 Anson Road, Singapore 079912
Tahmimm Hassan
Director
Tel: +65 6411 3890
Email: tahmimm.hassan@blackrock.com
BlackRock was one of the world’s first providers of dedicated transition management services since its inception in 1993. We have built a market leading transition service, carrying out hundreds of assignments every year, among which are some of the largest and most complex transitions in global financial markets. Our 60+ transition professionals are located in London, Budapest, San Francisco, Chicago, New York, Hong Kong, and Tokyo and service clients across all time zones. Our team is fully dedicated to the transition service and leverages the many benefits of the wider BlackRock platform.
As an asset manager, BlackRock’s business model is fully aligned with the objectives of our clients. BlackRock focuses on providing tailored transition solutions to meet our clients’ needs and requirements. Our clients directly benefit from the scale and size of BlackRock’s trading platform, the pricing power it achieves and the experience of our traders across all asset classes. Every transition is executed on BlackRock’s world leading portfolio and risk management platform, Aladdin, designed to handle the most complex transition.
