UK - New Frank Russell research on the portfolio transition management business has revealed a wide gap between promised cost estimates and delivered performance.
The research compares clients’ actual transition performance results to the original cost estimate provided by their transition manager during the pre-transition phase.
It encompassed transition events initiated by more than 100 pension funds based in the UK, Continental Europe, the US, Canada and Australia, between the third quarter of 1999 and the first quarter of 2001.
The study shows on average that there is a performance slippage of 99 basis points over and above the cost estimate provided to the client. Thus, said Frank Russell, a transition client accepting a mean cost estimate of 25 basis points would typically experience an additional 99 basis points of unexpected performance slippage, realising an average performance shortfall of 1.24%, or five times the cost estimate provided.
“The goal of this exercise was to see if low cost estimates result in low cost transitions for clients,” said Natalie Pilcher, client executive in Frank Russell’s London-based transaction services team. “Clearly they do not, and in our experience, clients are unaware that such a substantial gap exists.”
In the study sample, the correlation between original cost estimate and realised performance cost was only 0.13.
“The 0.13 correlation suggests that typical cost estimates have little relationship to the results transition clients are likely to achieve,” Pilcher said.
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