Global Pensions held its fourth annual Transition Management Forum London on 10 September 2008 at Plaisterers' Hall.
The day opened with a presentation by Ben Gunnee, European director of Mercer Sentinel, who stated from the outset that transition management was, of course, worth it.
He illustrated his point with a graph which illustrated that transitions were Òby far the most costly and risky of all transactions a pension fund can undertakeÓ. He then compared the suitability of asset managers and specialist managers in handling the various elements of a transition, with asset managers only having capabilities in certain parts of the process. Gunnee stressed that project management skills were essential in a transition manager and 75% of the costs of a transition were implicit and it was therefore important not to choose a transition management purely based on them having the lowest fee.
Keynote: Overview and thoughts on the future of the transition industry
Rick di Mascio, chief executive of Inalytics and chairman of the T-Charter, started by pointing out the T-Charter wasn't a document for transition managers, but instead constituted Òtransition management for dummiesÓ and had been designed to Òhelp clients with due diligenceÓ.
He said he had seen references to the T-Charter appearing in RFPs not just in the UK, but in Europe as a whole and also increasingly in the US, with the market conditions of the last year highlighting the Òreal value of planningÓ
He continued to say the next step for the T-Charter was to seek the involvement of pension funds outside the UK in making it more relevant to their needs.
Panel: Transition management for pension funds Ð how should a pension fund go about researching the area without prior experience?
Chris Adolph, head of UBS Investment Bank Transition Management (EMEA region), Ben Gunnee, European director of Mercer Sentinel, David Goodman, managing director, Securities Trading, Asia Pacific, State Street Global Markets, and Steve Webster, head of transition management, RBS, participated in this panel session, which was chaired by Alex Beveridge.
Among the points made were the facts selection of a transition manager shouldn't be an event-driven process, but more of a relationship-building exercise over time. It was pointed out selection of a transition manager differed greatly from selection of an investment manager Ð and was arguably more important Ð and the traditional beauty parade might not necessarily be a wise move since it risked exposing confidential information to the markets.
The importance of due diligence was also stressed Ð not just in terms of a pension fund going to a consultant for advice, but also in terms of the pension fund doing its own research to understand the true value of a transition manager.
Risk management in transition: Implications of current market conditions
Mark Dwyer, vice president UK sales, Mellon Transition Management Group, pointed out how the current illiquidity of markets was forcing transition managers to hold assets longer, requiring them to integrate their approach with asset management skills.
Against such a scenario, Mellon focused only on quality assets in a transition. ÒIf you have rubbish today in your portfolio, it would be even worse tomorrow,Ó said Dwyer, explaining Mellon assigned such assets to a ÔWorkout Manager' whose mandate was to achieve value in the least amount of time.
Dwyer concluded by explaining how beta management should be a temporary solution, leading to transition as the ultimate goal.
Transition managers as advisers Ð a combination is needed
John Minderides, head of transition management, JPMorgan, described the evolution of the transition manager's role since the early 1990s, highlighting the specific importance of the T-Charter.
Despite the controversial debate around it, he said the Charter Òcreated a common ground and made [the transition manager] realise the differences were not as great as they sounded.
Minderides reiterated several times the expertise of transition managers was not in alpha generation, but in minimising the cost of the transition and in finding the necessary liquidity.
With time, he said, transition managers have evolved into trusted advisers and ongoing service providers for pension funds.
The challenge of fixed income transitions
The credit crunch posed specific challenges to fixed income transition events, according to Steve Webster, head of transition management at RBS. Banks' capital commitments have reduced significantly, in some cases overnight or over one day.
Credit spreads more than doubled in 2007, while the demand for inflation exposure has continued to be high in 2008. In line with increasing spreads, the market in asset backed and mortgage papers has stagnated, turning them into Òvirtually untradeable assetsÓ.
The bond substitution process illustrated by Webster allowed the benefit of identifying bonds with similar risk characteristics, which could be traded as pairs, reducing the spread.
Keynote: The NAPF and the T-Charter
National Association of Pension Funds (NAPF) investment council member Alick Stevenson explained the NAPF's involvement in the T-Charter.
He said the NAPF wanted to use the T-Charter steering group as a mechanism to get a better understanding of the importance of selecting a transition manager in parallel with the actuarial evaluation assessments; asset and liabilities study evaluation and the hiring and firing of managers.
Stevenson said it wanted the T-Charter to reflect best practice and assist, not complicate, pension fund transitions for its members.
And, as with everything that is not regulatory, Stevenson added: ÒWe would like transition managers to comply or explain why they don't follow the T-Charter principles.Ó
Panel: Globalisation in transition management Ð a comparison of regions
Mellon Transition Management's Mark Dwyer, Barclays Global Investors' head of transition management for Europe and Asia Lachlan French, JPMorgan's global head of transition management John Minderides, Citi's global head of transition management Tim Wilkinson and Mercer consultant Andrew Williams participated in this panel, which was chaired by Alex Beveridge.
The panellists said transition managers were looking at the same transitions across the globe but felt the NAPF should get its teeth into the T-Charter before taking it to the US.
Minderides explained the US had a different agenda to the rest of Europe and there were different relationships between fiduciaries and trustees. They all agreed the objective of a transition manager was not only to execute, but also ensure daily operations operated smoothly. Other key points raised were the need to ensure managers acted in the best interests of the client and the fact the objective was to get the assets in place so the client had no need to make no alterations.
Optimal trading for portfolio transitions
Chirag V. Patel, assistant vice president, portfolio and risk management group, State Street Global Markets, talked about the various statistical methods a transition manager can use to determine the optimum trading point for transition activities.
He demonstrated that while implementation shortfall was the most cited headline risk, the truly great risks to a portfolio transition were opportunity cost and market impact.
Patel used complex algorithms to demonstrate the ways in which a transition manager could mitigate and minimise tracking error between legacy and target portfolios. He demonstrated how transition mangers could reduce their tracking error by up to 40% through a careful appreciation of the different methods involved.
How to measure the success of managing a transition.
Tim Wilkinson, global head, Citi Transition Management, talked about measuring a successful transition from both a quantitative and qualitative perspective and asked which was the more effective method from a client perspective.
Wilkinson argued that while quantitative methods to demonstrate how the transition had been carried out were important, ultimately client satisfaction and communication were the most important factors.
He said a transition manager would not always carry out the ÒperfectÓ transition, but the industry should have the maturity to be honest with clients and admit when things went less well than expected.
Mitigating risks during transitions
In the closing presentation of the event, Lachlan French, managing director, head of transition management for Europe and Asia (ex Japan), Barclays Global Investors, explained the processes behind some of the most complex transitions he had done.
He talked about a three-month project restructuring a multi-manger portfolio, which involved a six-week trading window, a total of 100 accounts, over £18bn in assets to be transitioned by a team of eight specialists and, as French added, "a lot of sleepless nights".
Key to success in any transition, especially one so complex, he said, was the specialist expertise and experience in physicals and derivatives, dedicated resources and a true multi-asset class capability.
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