At Mellon Transition Management, the transition management division of New York-based BNY Mellon Asset Management, the number of inquiries for transition management has increased by 40% during the first five months of 2009 compared with the same period last year. Mark Keleher, chief executive officer of MTM, said such numbers represent a good indication of future manager turnover activity and predicted that a record number of institutional investors globally will be replacing managers in the third and fourth quarter of this year.
Mr. Keleher added that Mellon made 325 transitions on behalf of clients worldwide this year as of May 31, a 37% increase from the year-earlier period.
“It is as if every single dollar in the world is up for grabs,” he said.
“What we're seeing is that, in general, managers who underperformed by just a little have essentially been forgiven by clients given current market conditions,” Mr. McNickle added. “It's the managers who have underperformed drastically who are being targeted (for possible termination). Clients have lost confidence in their investment strategy and investment discipline.”
But decisions to hire and fire managers based on performance can backfire if institutional investors fail to understand the effects of certain style biases on performance, among other risk/return factors, according to two other reports. The first, published by InterSec Research, Boston, concluded that short-term performance might be leading some institutional investors to terminate managers at the wrong time and miss out on the longer term benefits of active management.
A performance review of the top 10 managers in InterSec's Europe, Australasia and Far East-plus universe found that four out of the 10 had fallen into the lowest decile during a 10-year period on a rolling three-year basis, according to a client report published in May. InterSec researchers analyzed performance data of managers that won the largest amount of assets and those with the best long-term track records from March 31, 1999, to March 31, 2009. “Some of these top-performing managers endured prolonged periods of underperformance relative to their peer group,” according to the report.
“What this (report) indicates is that there is a case for taking the contrarian approach when hiring managers,” Pieter Nelissen, research consultant at InterSec, said in an interview.
“If top asset managers are going to undergo some fluctuations in performance, there is a case for hiring them when they're underperforming.”
Mr. Nelissen points to the first half of 2009 as an example in which investors who “stayed the course” benefited as markets rebounded. “Investors who were quick to get out because they couldn't bear the volatility would have missed out on the subsequent gains,” he added.
In a separate report, State Street Investment Analytics, Edinburgh, went a step further and reviewed the processes by which executives from 18 major U.K. defined benefit plans change managers. Researchers also did a series of interviews to better understand what triggers manager turnovers. (Both InterSec and SSIA are owned by State Street Corp.)
“Top business winners are invariably managers with good short-term performance,” according to the report. However, on average, “managers hired do not outperform in the immediate years following selection.”