By definition, transitions are movements of portfolio assets arising from changes in investment manager, asset allocation, investment style or large-fund flows. Transition managers are third parties that orchestrate the transition process with the aim of preserving the value of the assets in flux. “Because transitions are significant, complex and lengthy affairs,” writes Monica Schulz, a TABB Group analyst and author of the research report, “they are subject to an exceptional number of risks. Opportunity cost, market impact, bid/ask spreads and operational risks are all magnified when executing transition trades clients, primarily defined benefit and defined contribution plan sponsors and, to a lesser extent, sovereign wealth funds, endowments, trusts and high net-worth investors.”
Recently, prudent asset owners have become more liberal in their use of transition managers, explains Schulz. Historically, transition management was a service used exclusively for the movement of equity portfolios. But today, she says, “the complexity of asset movements vary drastically and more asset owners are sending other types of assets, including fixed income and foreign currency transitions, to transition managers.”
Twenty years ago, the transition management industry focused its efforts on protecting the value of transitioning assets against operational risks. Currently, says Schulz, “it focuses on mitigating opportunity cost, market impact and other investment and trading risks.” Transition management firms utilize risk analytics to schedule orders according to a variety of factors. In addition, transition managers are developing algorithm technology that interacts with pools of liquidity to complete orders as efficiently as possible.
Schulz also points out that the number of transition managers who actively pursue transition mandates is expected to drop over the next two years, especially among investment bank providers. “Given the Street’s current cost-cutting environment, along with the transition business’s relatively slim margins, as compared to those of program trading, TABB Group expects that several of the current investment bank players will make a soft exit from the business,” she writes.
For this research note, TABB Group spoke with 15 US, Canada and UK-based participants, including major asset owners, top-tier transition managers and widely known investment consultants. Discussions covered transition management industry statistics, performance measurement standards, trading and risk management techniques and technology. With asset owners, TABB Group also discussed transition manager usage, differentiators between providers and expected future demand of transition management services.