A look at the latest trends in transition manager selections and the questions clients should be putting to prospective providers to ensure they appoint specialists who best suit their needs.
Structural market changes, such as the shift from defined benefit (DB) to defined contribution (DC) pensions, have had a downward impact on the frequency of transitions and transition manager selection in certain market segments where transition managers have traditionally operated. At the same time, however, there has been an uptick in transition activity, and a greater recognition of the value of transition management services, outside of the pension fund sector. “While the numbers are smaller, some of the non-pension fund client sectors are using transition managers a little more, whether that’s fiduciary managers, insurance companies, wealth managers or investment managers themselves. These can be larger and often more complex events,” says Andrew Williams, principal at Mercer Sentinel Group. “Many of these asset owners will have multiple funds, such as wealth management platforms, and a keen customer focus, so ensuring the customer experience is not adversely effected can be a key part of the transition process.”
This increase in complexity has been a steadily rising trend across the gamut of clients that transition managers serve. As David McPhillips, institutional sales, transition management at Northern Trust, notes: “Although the number of events being conducted may have marginally decreased, the aggregate value and by extension, the risk attached to transitions, continues on an upward trajectory. Consolidation pervades the industry and as large asset aggregators (OCIO providers, master trusts, pooling structures, DC platforms, etc.) continue to amass client assets, the type of clients we are working with is beginning to morph from a traditional asset owner to look and feel more like an asset manager.”
In line with this, many clients are now appointing a panel of typically two to five transition managers with specialist expertise in order to support their increasingly complex transition requirements across multiple events. “Historically, each transition assignment has required a separate manager selection exercise. In recent years, however, clients have put in place a panel of providers, allowing them quick access to pre-selected managers. Whilst this approach ensures broadly less hassle in engaging a transition manager, it can lead to a couple of problems,” explains Steve Webster, senior adviser at MJ Hudson Allenbridge. This includes ensuring that the manager selected for each transition can deliver the most effective solution for that particular transition challenge, and regularly conducting market reviews to keep track of the continually developing tools and skillsets offered by providers.
At the same time, other clients are looking to build longer-term partnerships with transition managers rather than taking a transaction-based approach for each transition event. Andy Gilbert, EMEA head of transition client strategy at BlackRock, says: “We see the world in two halves: the mature market where experienced clients are increasingly establishing one-to-one exclusive transition management relationships with a trusted provider and the growing markets where clients assemble panels but are more targeted in their selection of transition managers based on technology platform, depth and experience of the transition team, global reach, and the transition manager’s trading platform and access to liquidity.”
Established relationships can offer benefits such as greater familiarity with the client’s culture, reporting preferences, portfolio and investment objectives. A senior executive who formerly had oversight for transitions at an Asia-based corporate pension scheme stresses the importance of long-term relationships, noting that conducting RFPs for every transition event can be unproductive. The executive adds: “Pricing in long-term relationships can be managed more effectively than trying to squeeze out every basis point via an RFP process.”
Comparisons beyond cost
While approaches to transition manager selection will vary depending on the client and nature of the event, there are a number of factors that asset owners should consider. Although cost has been and will continue to be a key priority for clients, increased competition in the industry has tended to reduce the extent of cost differentiation and led clients to take a more holistic, value-driven approach to manager selection. Rather than attempting to compare managers on an ‘apples-to-apples’ basis around fees, asset owners are now placing a greater focus on strategy, risk mitigation, and project management, says Bo Abesamis, executive vice president and manager in the trust, custody, securities lending and transition management group at Callan.
To select a provider that can deliver a strategy that most effectively aligns with a client’s needs, the client must first have a thorough understanding of their objectives for the transition. Richard Butcher, managing director at PTL, a provider of independent trustee and governance services to corporate pension schemes and non-pensions trusts, says: “This analysis piece will often narrow down the number of choices that a trustee has, filtering out those transition managers who would be inappropriate for a particular project, for example if they have a different area of expertise. The key questions don’t come when you are selecting a transition manager, they come when you’re spending all that time thinking about what it is you want to achieve through that transition.”
With these objectives established, prospective clients can better understand how the nuances of each transition manager’s offering best suits their requirements, from the provider’s governance framework and business model through to their reporting capabilities and the experience of their team, and their approach to transparency, trading, and risk management through to their operational infrastructure and systems. “Gaining an understanding of the transition manager’s model is key,” says Northern Trust’s McPhillips. “How are they structured? How is liquidity sourced? Are there any inherent conflicts with their model? Can risk be effectively managed – and communicated – through the various stages of the transition? How committed is the provider to the space? Are they investing in their business? Ultimately, how does the transition manager mitigate cost through the transition, both explicit and implicit?”
Asset owners should not be afraid to ask transition managers probing questions about their experience and previous strategic approaches to transitions. “Transition management is a people business; it’s such an involved process that it cannot be automated completely,” says Artour Samsonov, head of transition management EMEA at Citi. “Clients should focus on questions around the types of projects the transition manager has done and their outcome, and how project-specific challenges were addressed. The key is to get the transition manager to open up about their experience and have a dialogue about their approach to managing risks.”
Historical track record can help to inform the selection process, supported by client feedback and real-life examples. “I would encourage clients to ask for anonymised pre- and post-trade examples,” says Cyril Vidal, head of portfolio transition solutions at Goldman Sachs International. “That gives you two things. First, it enables you to appreciate the level of transparency you will be provided with during the transition process, and second, you can compare the finished product to what you have been promised, so it sets the standard. In my view, this is the most useful piece of information you will get in an RFP.”
Getting into the details
More recently, some prospective clients have also been asking questions that extend beyond a provider’s transition management capabilities to assess their suitability on an institutional level. Samsonov says: “We’re seeing more questions not just around our transition management service, but also about our compliance with the corporate social responsibility principles as a firm. Cyber security and business continuity are other important topics.” This shift reflects the changing business environment, he adds, in which clients are only engaging firms that have a robust approach to emerging risks, such as cyber security, and that take into account broader societal considerations, such as inclusion and diversity, and environmental policies.
As transitions become more complex, the transition management-specific information prospective clients and consultants seek has become increasingly detailed, with more in-depth RFPs drawing out both quantitative and qualitative information from providers. “It’s good to have that granularity because it means you go beyond the cost of the transition,” says Callan’s Abesamis.
This qualitative information, backed up by quantitative data, can provide context and assist clients in understanding what lies behind different cost estimates. “It’s important to get to the bottom of the proposed strategy, it’s a good basis for comparing transition managers,” says Tim Gula, an associate in Goldman Sachs’ portfolio transition solutions team. “If one manager is intending to execute a more aggressive approach and another a more passive approach, this can sometimes explain the difference in the cost estimate and should be considered instead of comparing two numbers in isolation.”
Yet, as always, it is vital that any selection process is accompanied by comprehensive due diligence. BlackRock’s Gilbert says: “Clients’ understanding of transition management has definitely increased over the years which in part explains the granularity of questions we see. We view this as highly positive. However, whilst RFPs and pre-trade reports are very helpful in understanding a transition manager’s capabilities, on-site visits remain the best way to truly understand what a manager can offer. Only by undertaking a formal due diligence meeting and site visit can you truly understand the systems they are using and the people who will be involved in the activity.”
Selection support and guidance
Consultants can play an important role throughout the selection process, supporting clients with limited bandwidth or knowledge of the transition management landscape. PTL’s Butcher says: “Generally speaking, you won’t find a board of trustees who are adequately resourced to ask the right questions or do the due diligence, so I would expect a consultant to help guide the trustees through the initial decision-making process, help them search for the right transition manager for them, and then carry out the routine due diligence to make sure they are a fit and proper firm to do the transition.”
The information provided by transition managers to clients can be complex and not uniformly presented, points out MJ Hudson Allenbridge’s Webster. “Adding to this the fact that transition events are infrequent, leaves clients in the virtually impossible position of being expected to make the right decision based on information which most admit they simply don’t fully understand,” he explains. “The granularity of data can also be extreme, to the point that the important expenses and risks are lost in a blizzard of reporting. From our experience, we see clients now requesting a ‘translation’ of the information they receive from transition managers. As an independent adviser, we simply take this information and distil this into its relevant components, against which we can then show evidence of performance and accordingly formally advise on next steps.”
Ultimately, transition manager selection is a crucial step in enabling an asset owner to achieve their transition objectives and thus it is a process that should not be overlooked or underestimated. As Mercer’s Williams notes: “From a client’s perspective, they might see the transition as ‘we’re terminating two managers and hiring three managers’ but there’s an awful lot more that goes on under the bonnet than that.”
This article features in the Transition Management Guide 2019. Download the full guide here.