The changing landscape in transition management and the desire for increased returns on cash have generated new interest in a longtime offering — overlays.
As transition managers like Bank of New York Mellon Corp., Credit Suisse and J.P Morgan Chase & Co. have left the business, two money managers — Parametric Clifton and Russell Investments — have stepped in to provide overlays as a way to move assets other than through traditional securities sales.
That use has dovetailed with the desire by asset owners to be more nimble and find excess return on cash, two things historically offered through overlays but finding new interest today in a zero-rate environment for cash.
“There are new things that are happening,” said Ross McLellan, founder and president of asset servicing analytics provider Harbor Analytics, Hingham, Mass., which studies transition management. “Pension funds have become a lot more complex. ... Overlays can provide a quick way to help rebalance, plus it can provide exposure to more esoteric asset classes, and they can get you that (exposure) synthetically more quickly than a traditional transition manager. Pension funds are seeing this and want to take advantage.”
Added Brian Roberts, senior consultant, NEPC LLC, Boston: “If one considers the outlook for equity and fixed-income returns going forward, in addition to cash earning essentially zero, pension funds are looking for ways to improve the efficiency and performance of their plan without sacrificing the liquidity needed to meet benefit payments.”
Overlay manager Parametric Clifton, Minneapolis, has added $3.4 billion in institutional client assets since Jan. 1, raising its total assets under management to $46.5 billion as of June 30, said Jack Hansen, chief investment officer. And while Parametric Clifton does not break out how much of its assets are managed for transitions, Mr. Hansen said there's “a constant amount subject to them.”
For Russell Investments, “there are more inquiries about overlays regarding alternative investments consistent with the growing demand for alternative investments,” said Travis Bagley, director of transition management, North America in Seattle. “It's been interesting to watch.”
Russell managed $45.7 billion in overlay strategies as of Dec. 31, according to Pensions & Investments data.
Mr. Hansen said the exit of the three banks from transition management in the past 18 months has created opportunities for Parametric Clifton, and he expects even more business from pension funds and other asset owners moving to outsourced CIO arrangements. With outsourced CIOs, investment changes can be made more quickly than through traditional board decision-making process and they can use overlays to make more complex transitions more quickly while still retaining liquidity, Mr. Hansen said.
“We're in transition management from an exposure standpoint,” Mr. Hansen said. “Traditional transition managers are called infrequently, usually just for larger traditional transactions like buying and selling securities. We do more "exposure management' for all sorts of transitions that are made all the time.” Examples Mr. Hansen gave include real estate investments, policy target allocationchanges, rebalancing, changes in commodity investments, and moves to direct hedge funds from funds of funds.