North-western European markets have traditionally had a higher concentration of potential clients with the characteristics suitable for using transition managers, so they have received a greater level of attention from providers and a thriving market has developed. Nations to the south and east present largely new ground but market developments mean they are increasingly in a position to benefit from services.

Transition management usage largely moves in line with the size and maturity of the pension fund industry, which explains why it is much more established in the UK and Scandinavia than in other parts of Europe. While transition management is less well developed in eastern and southern European markets, it is for very different reasons.

“The pension fund industry in many eastern European markets is not as established as in their western counterparts,” says Peter Loehnert, co-head of the EMEA transition management team at BlackRock. “The size of many of the individual pension pots is not of a sufficient scale to fully benefit from the advantages that transition management brings.”

In southern Europe, size does not tend to be a great obstacle. However, the vehicle structure through which many investors obtain market exposure can prove challenging. Obtaining exposure via pooled vehicles adds a degree of operational complexity that in the first instance may deter prospective users from using transition management services.

“We have seen transition events in Portugal, France and Italy but there are fewer funds of a scale that would justify appointing a transition manager,” says Mercer Sentinel Group principal Andrew Williams.

Two-way education

For transition management to become established in new markets transition managers need to learn more about local nuances, while domestic investors and asset managers need to be introduced to the benefits they can secure.

Transition management in its current form is in some cases not suitable for new market entry owing to local regulations, according to Loehnert. “We are continuously working with local market regulators to fully understand the constraints of their markets, so that we can evolve the transition management service to meet the needs of these prospective new users,” he says.

“However, we would always urge clients to focus on the cost gains and leave the operational complexities to a provider that is fully experienced in managing transitions,” says Loehnert, adding that it is fundamentally important that proactive moves are made to reach potential clients.

“Everything starts with education. It is important that institutional investors are aware that the service exists and fully understand the benefits that can be gained. We spend a lot of time with investors to understand their current and future needs and to develop strategies to help achieve their financial objectives.”

“As we become more involved in markets in southern and eastern Europe we are able to build upon our understanding of the potential challenges that these clients may face in relation to transitions and find solutions that are well suited to the service,” adds Loehnert. “We are asked to evaluate potential transitions for clients under a variety of circumstances and believe that we can add value whether we are engaged to manage the event or not.”

Different regulatory and market structures in individual European markets as well as language challenges make it harder for transition managers to swiftly break into every market across the region.

In addition, Williams has not seen transition managers cater for defined contribution (DC) schemes on a large scale as typically asset sizes are smaller, although that is likely to change as interest in DC schemes increases.

French regulation

There are considerable differences in transition management penetration even between western Europe markets; some very developed investment markets experience relatively low levels of activity.

“France is a good example because of the structure of the market,” says Chris Adolph, head of transition management EMEA at Russell Investments. “Pension funds largely invest in pooled-type vehicles or FCPs (fonds commun de placement). Transition management has historically only been used by the very largest entities. This is partly because of the compliance regime – if you are looking to be appointed as a transition manager for a French fund, you almost have to act as an asset manager because you are named in the prospectus.”

This is a very different situation to how transition managers typically work. Usually, they come in for a short period of time to transition certain assets and don’t always take on responsibility for managing the underlying assets. As a result, past transitions in France have been largely managed under the broker-type model.

“Over the last number of years we have worked with the French regulator to educate them about the value of using a transition manager and how we can fit into the system, so that funds can use our services and avail of the risk and cost advantages.

“Instrumental to this was utilising a separate French Russell Investments entity. When a manager is being terminated, the entity comes in and takes control of the fund, as an asset manager, and restructures it before handing it over to the new manager or transferring the securities to a different FCP.”

Adolph says the number of entities in France engaging a transition manager on this basis has increased significantly over the last few years. More than €11bn of transitions have been undertaken in the first half of 2016. “This shows that if you are willing to work with the regulator and take on some of the investment management responsibility, you can execute a transition successfully.”

Italian due diligence

Italy shares some of the same characteristics as France, where in the past clients would have hired transition managers to act as a broker. Compliance impediments and due diligence for the underlying funds have made it difficult to use asset manager-based providers and in many cases it has been easier to hire a broker, according to Adolph.

“This can be cumbersome if you default to one of the new managers to manage the transition, who may not be best suited to manage the event, or have to force managers to trade with a specific firm in order to consolidate the order flow,” he says. “Some managers don’t like that approach, which can place clients in a difficult position.”

In mid-2016, Russell Investments hosted a conference (attended by the regulator and the central bank) at which it outlined the benefits of transition management for Italian pension funds in terms of transparency and cost and risk reduction – key issues for the compliance teams of these funds.

Adolph acknowledges that this approach takes time, but is convinced that working with the regulator in countries where the concept of transition management is less well understood is a worthwhile exercise. He says that in these countries regulators tend to favour a framework where the manager acts as a fiduciary and an asset manager, as they see clients getting the benefits of having a fiduciary as well as improved execution and risk management.

This is in contrast to the situation in the more mature UK and Scandinavian markets, where it is much less difficult to access the underlying securities and it is easier to take control of segregated portfolios, manage them and pass them on.

Despite significant progress, Adolph says that education is still the key factor for transition managers seeking to develop markets outside Western Europe. “The different countries within Europe do have very specific nuances, but regardless of the compliance framework the key messages of improved fiduciary oversight, cost and risk management rings true in whatever market you are addressing. Sometimes getting that message across takes perseverance and adaptability and that is something the transition industry has in abundance.”