Transition Management

"Transition Management" [NVDMTRANSM] is the process of managing change in an investor’s investments. Transition Management is also sometimes referred to as Implementation or Change Management. Transition Management typically relates to large institutional investors (or groups of investors) with large asset pools they manage on behalf of beneficiaries. The most notable example is a Pension Plan but these investors can also include medical schemes, life insurance companies, banks, managed investment trusts etc. But Transition Management is also encountered in relation with SMEs (small end medium sized entreprises) in the form of implementation focused change management on the basis of interim management intervention by external experts.

Types of TransitionsThe different types of transitions are almost infinite but all of these are usually triggered by external events. These events include changes: 1) in a investor’s investment strategy, 2) in liabilities / liability profile, 3) asset mix, 4) benchmarks, 5) mandates or external investment providers, 6) corporate or legal structures.

Costs and Risks involved in TransitionsIn order to implement these changes certain assets will have moved, sold and/or purchased to align the current investment structure with the new investment structure.The values involved in these changes are considerable and any saving, (even a few basis points (one basis point = 0.0001), can save investors millions of dollars. Consequently any unnecessary cost can result in considerable losses. Costs management form a large part of any transition. Some cost are unavoidable (for example stamp duty) and some costs are highly negotiable (like the transition manager’s fee, brokerage costs etc.). These costs, termed direct costs, account for only a small portion of the total cost of the transition. Indirect or implicit costs account for more than 80% of total costs and are ‘hidden’ within the transaction detail of every single trade. Indirect costs are notoriously difficult to measure but offer the greatest potential for cost savings if managed proactively and correctly. Apart from these costs there are also a number of investment risks faced by an investor in transitioning assets. Assets in transition are, for a lack of a better description, in a state of 'flux'. It is important to understand what risks the plan are exposed to during this change. Some of the major risks might include asset allocation risk, active management risk, currency risk, settlement risk etc.

Transition Manager’s RoleThere are a number of stakeholders involved in the transition process at any given time. These might include a board of trustees, a consultant, an actuary, investment managers, custodian banks, brokers etc. It is essential to co-ordinate their individual efforts effectively to ensure a smooth transition. This is quite an onerous task and investors typically employ the services of a Transition Manager to fulfil this role.

Transition management is a systematic, controlled process that utilizes all available sources of liquidity to simultaneously minimize the total cost while managing the overall risk of the transition. [ [http://www.mellon.com/transitionmanagementservices/intro.html Transition Management Services] ]

Transition management is a service usually offered by sell side institutions to help buy side firms transition a portfolio of securities. Various events including acquisitions and management changes can cause the need for a portfolio to be transitioned. A typical example would be a mutual fund has decided to merge two funds into one larger fund. In doing this, large quantities of securities will need to be bought and sold. Another frequent occurrence is a firm wanting to liquidate a large portfolio. The process of doing this can be very expensive. The costs include commissions, market impact, bid-offer spreads, and opportunity costs.

A firm seeking to transition a portfolio will often look for an outside firm to perform the transition. Transition managers are generally able to transition the portfolio at a lower cost than what a firm could do internally. Companies offering transition management can also add value by helping plan the transition, managing risk during the transition, and generating reports after the transition. [ [http://www.ssga.com/library/capb/Transition_Mgmt_Ovw/page.html State Street Global Markets Capability Overview] ]

Transition managers have a number of methods to help transition a portfolio. Usually they are directly connected to multiple markets or liquidity centers. They can execute orders using algorithmic trading, and thereby minimize market impact. Since they may be transitioning several different portfolios they can cross orders, reducing commission and exchange fees. [ [http://www.investopedia.com/terms/c/cross.asp Crossing orders] ] . Additionally, they may have specialist traders who handle illiquid securities.

A fiduciary-friendly recent trend has been to remove all conflicts of interest associated with transition management by "unbundling" advice from execution through the use of a transition or brokerage consultant. In this way, the adviser's sole possible interest is improving performance and lowering execution costs, rather than having a trader and adviser under the same roof.

References


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