2013 drop portends transition management shift

Transition managers' assets from U.S. pension funds declined 10% to 15% in 2013 as those clients managed more traditional investments internally, reduced the amount that's rebalanced, and increased their allocations to alternative investments.

That reduction, sources say, could become a long-term trend.

“The shifts point to the potential for a long-term structural decline in transition management business,” said Adam Sussman, New York-based partner at financial markets research and advisory firm TABB Group LLC. “For the remaining pools of transition management, there's more competition in the space, more pressure from regulators, more competitive fees. Across the board, it's not a great time to be in any business that's transition oriented.”

Added an investment executive at a public pension fund who spoke on condition of anonymity: “There probably aren't a lot of people moving money around. Big institutions are getting more sophisticated in how they do things. That has kind of marginalized transition managers.

“The long-term trend, over the last five years, is pension funds are bumping up their alternative investments, real estate, hedge funds — all stuff that's not going to transition managers,” the executive added. “Plus, the big guys (pension funds with more than $50 billion in assets) are doing this through their own trading desks.”

Although sources could not say how much U.S. pension funds saved in lower fees in 2013, they estimated a 10% to 15% reduction in assets transitioned in the year.

Nicholas J. Bonn, Boston-based executive vice president and global head of State Street Corp.'s portfolio solutions business, agreed transition mandates declined across the industry last year, “which we attribute to a continuation in a trend toward alternative investments. Additionally, the broad-based equity market rally in 2013 muted the differentiation between investment managers, resulting in fewer manager terminations and portfolio rebalancings.”

Last year's gains in the equity markets resulted in fewer large asset shifts, particularly in December, traditionally a time when pension funds rebalance their portfolios. “The way the markets have gone, we haven't seen the major asset shifts that we have in the past” among investors, said Thomas Schoenbeck, senior investment consultant at Hewitt EnnisKnupp, Chicago. “The markets have been good,” Mr. Schoenbeck said. “Pension funds might just be restructuring, sticking with their portfolios.”

The pension fund executive agreed, saying he would consider using an external transition manager only for larger transitions. “I will minimize the use of a transition manager in a single asset class; I can do that myself,” he said. “The big, global asset class shift, of $1 billion to $2 billion, that's a multiday process. That's where I'm willing to pay someone to do this. To have someone to watch that set of assets, whose job it is to do this stuff, is especially valuable.”

Colin Rainbow, senior investment consultant at Towers Watson & Co., Reigate, England, said that assets transitioned globally have remained constant through 2013, but there is a change in where business is coming from. “Assets from global institutions and sovereign wealth funds have been rising generally at a steady rate,” Mr. Rainbow said. Meanwhile, the number of U.S. pension funds has continued to decline.

Mr. Rainbow oversees Towers Watson's transition management platform, which offers clients either a preapproved list of transition managers from which to choose on an as-needed basis, or issues RFPs for specific transition managers at clients' request. Among the 10 transition managers on the Towers Watson platform, Mr. Rainbow said, most have seen assets remain “quite level” over the past year, “and a couple bigger players have had better years in 2013.” He wouldn't identify the firms.

Despite those global standings, Mr. Rainbow said more institutional investors worldwide have been moving more assets into commingled funds, “which means less trading for transition managers to do.”

Other changes in the business have caused transition managers to change how they look for new business, added Hewitt EnnisKnupp's Mr. Schoenbeck. One major change: increasing use by clients of preapproved transition management firms that can be chosen for specific transitions rather than one manager for general use. Such a bench of managers, Mr. Schoenbeck said, allows pension funds to choose a manager based on “the cheapest price, the best price among the transition managers. It's pretty competitive. Among the transition managers we track, I'd say they have pretty comparable pricing.”

Transition managers are now trying to set themselves apart by “getting close to pension funds, to their consultants, to look at the asset allocations, the manager selection itself,” said TABB's Mr. Sussman. “They've gotten closer to the actual decision-makers at pension funds, to know what they want and what the (transition) manager can do to help.”

Also, the desire of pension fund executives for increased transparency provides transition managers with an opportunity to gain business, for example, by providing post-trade reports, Mr. Schoenbeck said.

The reduction in assets moved came in a year that saw two firms — J.P. Morgan Chase & Co. and Credit Suisse Group AG, announce they were closing some or all of their transition management operations. But more contraction in the industry isn't expected, Mr. Schoenbeck said. “Long term, there'll always be a need for transition managers,” he said.

Officials at Northern Trust Corp. and Russell Investments said their trade execution for pension fund transition management rose in 2013.

“While we don't disclose specific numbers, I can say we executed more events in 2013 than in 2012,” said Grant Johnsey, Chicago-based vice president and head of sales and transition management at Northern Trust. “And though the average size was slightly down, we also saw an increase in "mega-events' and executed a multibillion-dollar transition that was our largest single event in more than two years. We also saw an increase in U.S. equity events vs. non-U.S. equity.” Mr. Johnsey would not identify the clients.

Travis Bagley, director, transition management-Americas at Russell Investments, Seattle, said his firm's global transition management activity in 2013 was up about 9% from 2012, in terms of assets moved. In the U.S., Mr. Bagley said, “We continue to see large asset shifts associated with derisking and multiasset solutions.”

Mr. Bagley also said activity from new clients “was significantly higher in 2013 than in 2012. This could be attributed to the fact that the number of industry providers offering transition management services decreased in 2013, so plan sponsors were looking to establish new relationships.”

State Street's Mr. Bonn said the factors that suppressed transition volume in 2013 “may actually encourage more portfolio rebalancings in 2014 as pension trustees look at the 2013 market effect on their policy asset allocation and decide to rebalance.” State Street does not provide specific breakouts on transition management.

Officials at BNY Mellon could not be reached for comment.