The transition management industry found itself in the news as never before as it struggled to agree a common set of standards known as the T-Charter. Global Pensions gathered some of the key players in the industry for a Chatham House rules debate. In keeping with these rules, no individuals are directly quoted, so as to facilitate free flowing and open discussion. Reporting by Alex Beveridge
Transition managers noted there was now a marked caution amongst some clients when it came to carrying out transitions. This was especially true when it came to fixed income, where there was hesitancy when it came to testing what bids there were in the market.
Managers agreed they had to spend more time explaining to clients the implications of market volatility, as well as explaining hedging strategies. Some pension funds were described as being very aware of the potential problems, while there was also a consensus there was a vital role for consultants to play in the organisation of transitions.
It was noted that over the last six months managers had been able to add a degree of realism to the debate over whether a pension fund should actually proceed with a transition. Providing a stop or go signal for clients was now seen as a valuable service in its own right.
Transition managers also claimed to be increasingly playing the role of adviser - sometimes at the risk of losing short term business - advising clients to stay put unless there was a desperately pressing reason to switch managers or re-allocate portfolios. One player said that while many clients were very aware of the potential dangers of transitioning in a volatile market, others required a combination of both the transition manager and a consultant to explain the situation.
Good project management was also flagged as an ongoing issue managers had to work on - participants added it was vital a firm showed commitment to its transition management business.
One manager noted that on a practical level, fixed income portfolios were presenting new challenges. He said portfolios which had credit which only a year ago was considered conservative now found it was no longer judged to be high quality.
The manager said his firm was attempting to segregate any credit aspect of a fixed income portfolio and asking the client for extra time to make the trade. He said that sometimes he could only get a bid when the market maker had the other side of the trade, a process which could take a several days. He went on to say there was often an attempt to segregate the hard to trade segments where possible, and then find a cash alternative to fund the new asset manager.
It was also claimed the credit crunch had scared trustees into questioning the actual value of their fixed income portfolios. He said that in the current climate of absolute illiquidity there was a buyers' strike, meaning that some fixed income was only worth what people were willing to pay for it.
Given the unknown nature of the credit crunch, it was agreed it was incumbent on transition managers to use their experience of the changes in process to help both consultants and investors better understand the new dynamics of the market. There was, according to one manager, a dawning realisation there was a cost to portfolio improvement, and that while this cost was once relatively minor, it was now growing.
It was also noted fixed income was now an increasingly important part of pension fund portfolios, especially as liability driven investment (LDI) gained popularity. This meant pension funds paid closer attention to their fixed income managers' performance, leading in some cases to a greater willingness to dismiss even slightly underperforming managers. However, pension funds were warned this was no longer such a simple process, making it vital any changes were well thought through.
Breaking the news
Panel members also discussed the fact many bond portfolio managers had incorporated some fairly esoteric instruments in their portfolios. It was suggested that in many cases clients were only now beginning to realise what they owned. Ultimately, some panel members felt it would be the transition manager who would be the first person to let an investor know what the actual current value of a given part of their fixed income portfolio was worth.
Transition managers were having to ask the question: How are you actually going to manage the risk profile of this during the transition, when you don't know how to price the asset and it turns out some of the instruments are a bit obscure?
One transition manager said he had in effect talked himself out of doing transitions because he had pointed out to clients looking to switch fixed income manager that their current manager might actually start to perform in the current environment. He said it was sometimes unwise to trust the statistics of a new manager - given the actual valuation problems. When this was added to the fact the transition would also end up being expensive, clients sometimes calculated it was more prudent to stay put.
The panel agreed that in these cases most clients would value the advice they received from the transition managers and reward them with loyalty in the future.
How the T-Charter has changed the perception of the industry
Panel members all agreed the T-Charter, the voluntary code of conduct, signed by the majority of transition managers in October 2007, had increased the level of trust pension funds had in transition managers.
Transition managers and consultants accepted the vast majority of clients only interacted with the transition management industry infrequently. It was also noted that even prior to the T-Charter, pension funds had not rejected using transition managers because of a lack of trust.
One veteran of the industry said he had noticed a shift in attitude from where transition managers were simply a necessary afterthought, to where they were often an integral part of the planning process. He said he had noticed this change across the globe.
There was also a change in the way transition managers were employed, with greater emphasis given to due diligence during manager searches and the increasing use of a panel of transition managers. This was all seen as evidence transition managers had moved up the value chain for pension funds.
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