Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Defined Contribution East
    • 2023 ESG Investing
Breadcrumb
  1. Home
  2. Print
May 29, 2006 01:00 AM

Transition managers see shift to emerging markets, alternatives

Gregory Crawford
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    Transition managers say U.S. pension executives are piling alternative investments and international equities, particularly emerging markets, in an attempt to boost performance.

    At the same time, they're also considering launching asset-liability matching strategies, these transition managers said.

    "There's clearly a decrease in U.S. equity in general and U.S. large-cap assets in particular," said Ross McLellan, a managing director at State Street Corp.'s investment research and trading unit in Boston, describing recent transition activity. "Basically there are three places where the money is heading: You have alternatives — private equity, hedge funds, real estate — global and emerging markets, and benefits."

    Most transition managers declined to provide data backing up their claims that pension plans are moving assets out of U.S. equities into other areas.

    For example, Brian Roberts, head of transition management in North America for Russell Investment Group, Tacoma, Wash., said the transition business at Russell was up more than 200% in the first quarter of the year from the fourth quarter of 2005. He said much of that growth was from clients worldwide increasing allocations to international equities, derivatives strategies and fixed income. But he wouldn't provide dollar amounts.

    "In international securities, we've seen an uptick in our activity from our Canadian client base due to the elimination of the foreign property rule," he said, referring to the law lifted last year that restricted how much Canadian pension plans could invest outside the country.

    He said within the international asset class, emerging markets have been a particularly popular target asset class among Canadian and other pension funds.

    "There has been some increased allocation to emerging markets," Mr. Roberts said. "It was, until the very recent past, trending up."

    In fact, the Morgan Stanley Capital International Emerging Markets index was up nearly 25% this year when it peaked at 881.52 on May 8. Since then, it's dropped about 15%.

    Mark Keleher, president of Mellon Transition Management Services, San Francisco, agreed that until recently, pension plan assets were moving into emerging markets.

    "People have been thinking about different ways to either exit the U.S. and invest internationally or exit emerging (markets) and go back to developed markets," he said. "We've seen a lot of that over the last few weeks given the performance of the markets."

    A global trend

    At Bank of New York, Kal Bassily, managing director and global division head of BNY Global Transition Management, added the move to international securities is global.

    "Within the international equity allocation, emerging markets is getting a bigger share than we saw it getting last year and the year before, but the bigger trend applies not only to U.S. pension plans or financial institutions," he said. "We see it on a global basis: increased allocation to international assets."

    He said pension plan executives and central bank officials in developing countries are leading the charge.

    "The reason this cross-border trend is strongest right now in developed countries is because they are behind the curve," Mr. Bassily said. "They've never invested outside their borders, either because of a lack of funds or a lack of view."

    At Russell, Mr. Roberts said the firm also has seen a 35% growth in derivatives strategies this year, which his transition management unit has helped facilitate. The strategies are typically used as pension assets move into alternative investments.

    He said many pension fund executives simply sell off a portion of one asset class, and then park those assets in cash before funding a hedge fund or other alternative strategy.

    But "by executing a transition in the hedge fund space using a combination of derivatives overlays along with physical long/short portfolios, we can provide solutions for clients, rather than defaulting to cash," he explained.

    Kevin Hardy, global director of transition management at Northern Trust Corp., Chicago, said the trick for transition managers in these situations is getting a return better than cash without losing principal.

    "A lot depends on how quickly managers are going to utilize the cash, because not all managers will utilize the cash immediately," he said. "We can create a portfolio, be it in physical (assets) or synthetics that gives clients something akin to what they want.

    "The goal at that point is to preserve capital."

    Mr. McLellan at State Street added that creating those kinds of portfolios is "next to impossible" if the pension fund is going to move the assets into a real estate portfolio, private equity or other types of alternatives.

    "With long/short portfolios, we are able to somewhat maintain the risk profile and the return profile of some of those mandates, but if you're going to distressed debt or convertible arb, those are typically funded with cash," he explained.

    "The responsibility of the transition manager is to find out what the short-term objective of the client is and to mirror that return," he added. "A lot of clients will say ‘mirror the return of the S&P 500,' some say ‘just get me LIBOR,' but sometimes we can't mirror the return of what they're going into."

    He said State Street researchers are looking into using options to replicate hedge funds returns, a strategy that Andrew Lo, Harris & Harris Group professor and director of the Massachusetts Institute of Technology Laboratory for Financial Engineering in Boston, has written about. "But we're a long way from implementing what he's suggested," Mr. McLellan said.

    Similarly, transition managers have been assisting pension fund executives who are using portable alpha strategies.

    "Very often, what we're seeing with portable alpha is moving physical assets to an array of strategies such as non-directional, long/short, GTAA (global tactical asset allocation) and hedge funds," said Mr. Roberts at Russell. "Using those as alpha sources, moving the physical assets there, then using derivatives overlay to port back to an asset class."

    Liability-led strategies

    In addition to the move to international equities and alternative investments, transition managers are helping pension executives pursue liability-led investment strategies.

    John Minderides, global head of transition management at JPMorgan Chase & Co., London, called the movement toward liability-driven investment strategies a "major theme," particularly in Europe.

    "We have done a number of transitions where we built LDI portfolios for clients," he said, adding that the funding source varies depending on the pension fund's age and its location.

    "In Europe, it's a bit from equities to bonds, but in the U.S., it's not necessarily like that," he said. "An LDI mandate doesn't necessarily mean bonds, it could be any investment."

    At Russell, fixed-income transition management business year to date has doubled over the same time period in 2005, driven in part by a move to liability-based investment strategies, Mr. Roberts said.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    Gender diversity is improving on FTSE 350 boards
    Gender diversity is improving on FTSE 350 boards
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    The Institutional Investor's Guide to ESG Investing
    Sponsored Content: The Institutional Investor's Guide to ESG Investing

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    The Future of Infrastructure: Building a Better Tomorrow
    Fulcrum Issues: Equity Returns and Inflation — Choose Your Own Adventure
    What Matters Most in Considering a Private Debt Strategy
    Why pursue direct lending in the core middle market?
    Research for Institutional Money Management
    Are Factors a Thing of the Past?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Defined Contribution East
      • 2023 ESG Investing