The adoption of transition management services in any particular market is primarily contingent on the asset classes favoured by its investment community. Transition managers continue to do the bulk of their business in the US, the Middle East, northern Europe and Australia. For all their ambitions for expansion, some regions are still only partially catered for and services are not offered at all in others.

“Suitability parameters include the various types of assets held, such as whether they are domestic or globally diversified or the assets publicly-traded or privately/closely held,” says Peter Loehnert, co-head of the EMEA transition management team at BlackRock.

“They also include the exposure vehicle – separate accounts or pooled funds for holding physicals, derivatives, ETFs – the legal holding structure, the investment size and local market regulation.” He adds that the regulatory component is nuanced and country specific, for example whether a country has a transaction tax that would be triggered by trading physicals.

“The level of client interaction with transaction managers varies considerably from fund to fund,” says Andrew Williams, a principal in the Mercer Sentinel Group. “There are some funds that have significant trading capabilities, equivalent to or even better than some transition managers, where it is harder to make a case for engaging a transition manager.”

Asia Pacific and the Middle East

Australia is a market where the major transition managers have a particularly strong presence. They have been established for some time, with domestic equity transitions the key focus.

Australian-based funds tend to be more accustomed to dealing directly in the markets and with the brokerage world, whereas in the UK pension managers are familiar with dealing with investment managers and consultants, observes Michael Gardner, senior managing director & global head of portfolio solutions, Cantor Fitzgerald.

The Middle East region has been growing in significance for transition managers for some time, in line with the development of sovereign wealth funds (SWFs). However, it remains a part of the world that still offers considerable scope for expansion.

SWFs in the Middle East and pension funds in Australia have much more in common than one might initially think, suggests Mark Dwyer, head of portfolio solutions EMEA at Macquarie.

“All clients are looking for value for money, but also the evidence that value was delivered,” he explains. “Every financial institution undertaking a transition is required to report internally – and in some instances externally – on the transition manager selected to handle the transaction, and also the results. This means the transition manager must be transparent at every stage in the transaction process, from the pre-trade through to the post-trade.”

Transparency around all fees and commissions is vital. At the end of the event, provision of a detailed post-trade report is the minimum required and, ideally, transition managers should also provide access to an independent transition post-trade report. Post-trade reporting is complex, but the provision of an independent report gives the reassurance that the transition manager is not ‘marking their own homework’.

Looking at the differences, the scale of the event can be a major factor, continues Dwyer. “Some transitions can be so large that execution in one or two days is not feasible. The hedging strategy is critical, but before this is designed the transition manager needs to establish not only the client’s attitude to risk, but also its definition of risk.”

Implementation shortfall is a useful measure, but minimising implementation shortfall is often not the client’s primary objective. Preserving the value of the fund is the most common objective and particularly where the client has been invested in the legacy portfolio for many years, minimising market impact can take priority over opportunity cost minimisation.

Asia is a region that transition managers have been talking about for some time as having considerable potential. However, Williams observes that some of the issues that affect the ability of managers to expand into new European markets (see from page 30) are also found in this part of the world.

“Every market in Asia has different regulatory requirements and nuances that transition managers need to understand, and the ability for funds to invest offshore will influence that market’s potential demand for transition managers,” he says. “A few managers have located staff in Singapore and Hong Kong, but no one has built up anything more than a small team. Japan is another jurisdiction that has been targeted for expansion, with varying degrees of success.”

The Americas

The US market has the greatest demand for transition management services outside of EMEA. This is fuelled by the sophistication of asset owners and the size and the diverse make-up of the market, according to William Cobbett, head of transition management Americas at Citi.

“The client base is very large and diverse in the US,” he says. “For example, public pensions and corporate pensions in the US have distinct reporting requirements that play a role in determining their asset allocation and we do relatively more equity events for public plans and fixed income events for corporate plans. Similarly, US plans rarely have cost of living adjustments so we undertake comparatively fewer inflation-linked events for US-based plans compared to other markets.”

Cobbett says that Citi views the relationships it has with its clients as partnerships, focusing on achieving their goals together as opposed to meeting their demands. “The goals from one client to the next within markets differ as much as the goals across national boundaries. Our process begins by understanding clients’ goals, then devising a strategy to implement them while minimising costs and risks.”

Cantor Fitzgerald’s business in the US tends to be more fiduciary-oriented for clients that are looking for a co-fiduciary and are less concerned with direct execution, explains Gardner.

“In Europe, clients are more interested in the execution infrastructure whereas many of the larger ones in Asia clients adopt a ‘do it yourself’ approach, so there are definitely regional variations,” he says. “This may have something to do with the fact that many European clients are more used to dealing with global execution than their counterparts in the US, where the market is less complex.”

Gardner suggests that client expectations have changed relatively little in recent years. “We see a modest increase in fiduciary-oriented projects, which is prompted in part not simply by the desire to have a co-fiduciary in the process but also the expanding role of the transition provider. It is no longer enough to be a transaction business – you need to be able to handle currency/asset allocation overlays, custom beta mandates and interim management.”

The US is seeing consolidation of asset management mandates, observes Pavilion’s head of transition management Mario Choueiri, which is having a knock-on effect for transition managers. “In the past, many plans had US equity managers for domestic business as well as international managers – now there seems to be a movement towards consolidating into a single global equity manager.

“However, the even more noticeable trend is that individual investment managers have not only faced performance issues but also significant departures that have created alarm within the consultant community and made consultants – and pension plans – nervous about staying with those managers.”

In the past, these types of situations might arise once every few years – now they are occurring with much greater frequency as clients have less patience with managers. “Plans, committees and their consultants seem to be much quicker to pull the trigger on managers as soon as there is a period of under-performance against their benchmarks,” he says, adding that Canadian pension schemes are less reliant on consultants than their US counterparts.