Copying and distributing are prohibited without permission of the publisher
ConvergEx Group: what makes a transition a successful event?
19 October 2012
Kal Bassily, managing director and head of global transition management at ConvergEx Group, talks about the importance of preparation and the benefits of in-house execution
In its most basic definition, a transition is the implementation of an investment decision driven by one of several different factors. These can include a change of investment manager due to performance, the addition of an asset class, a shift in asset allocation or a change of risk profile in the investment portfolio.
However, there are a number of complexities to consider when executing a transition to help fully maximise its value.
Kal Bassily discusses the elements of what makes a transition and a transition manager a success – careful planning, global experience combined with regional knowledge, in-house execution and sophisticated proprietary technology.
The seeds of a good transition are sown at the planning stage. Can you explain the pitfalls that good planning circumvents?
You’re exactly right. It’s during the pre- trade planning phase that the transition manager meets with the asset owner to understand the goals and parameters of the transition and, importantly, asks all the necessary questions to ensure a smooth and successful transition.
What questions the transition manager asks the client at this stage is crucial and is the reason why it is critical to use a manager with significant experience in a wide variety of transitions. For example, if the manager fails to enquire about issues like custody structure or the duration within which the transition must be implemented, it can create problems down the line. You don’t want to discover at the last minute that the legacy assets are coming out of a comingled fund, as that can delay a transition, with considerable costs, or – worse still – scupper the transition entirely.
The pre-trade planning stage is also where the manager learns of the constraints under which the transition must be carried out. The client may need to remain cash neutral throughout the whole transition portfolio. Or, in the case of a pension fund, the client may be prohibited by the investment mandate from using derivative instruments.
An experienced transition manager knows that the prohibition of derivatives requires large-scale adjustments in the planning of the transition. If a client is shifting from a G7 sovereign debt portfolio into an MSCI emerging markets equity portfolio, for example, there could be a daily cost of 120bps in terms of tracking error. Without a full understanding of the asset owner’s constraints, a transition manager might attempt to use a futures overlay to dampen volatility, especially since, with emerging market equities on one side, the transition will be spread over several days.
If the manager knows that the trading strategy cannot use futures to manage the risk then the strategy can be built around this constraint carefully. This is a process that takes time. Again, this is not something you want to learn at the last minute or the transition will be significantly less effective.
Is there a reporting element to the transition that must be considered?
Absolutely. Communication around this has become especially important in the growing area of transitions conducted for multi-managers, where transition managers will be employed to move assets between sub-advisors.