Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 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
    • 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
    • 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
    • 2022 Innovation Investing Conference
    • 2022 Defined Contribution East Conference
    • 2022 ESG Investing Conference
    • 2022 DC Investment Lineup Conference
    • 2022 Alternatives Investing Conference
Breadcrumb
  1. Home
  2. ASSET SERVICING
April 20, 2015 01:00 AM

Transition managers answer call for sophistication

Use of derivatives, complex investments lead to new abilities

Rick Baert
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Kevin Byrne sees a change in the handling of complex portfolios.

    Transition managers are adding new capabilities to transfer assets in complex derivatives, futures and options, along with traditional transfers of securities.

    These managers increasingly are using derivatives desks to handle the complex transitions, particularly in fixed income. Ross McLellan, founder and president of transition management data analysis firm Harbor Analytics, calls it “an evolution in the industry that allows transition managers to stay relevant.”

    The need for such enhanced capability was highlighted in the rush among pension funds and other asset owners to consider terminating Pacific Investment Management Co. following the departure of William H. Gross, co-founder and chief investment officer, who moved to Janus Capital Group in September. Much of PIMCO's Total Return Fund invests in derivatives and interest-rate swaps that required additional capabilities for transition managers.

    “PIMCO Total Return is a very complex portfolio,” said Mr. McLellan of Hingham, Mass.-based Harbor Analytics. “It has a ton of derivatives in it. The portfolio contains many interest-rate swaps, credit-default swaps and forward currency transactions in addition to futures. The issue with transitioning from it is that most transition managers will counsel their clients to ask PIMCO to close out the derivatives. That creates a big problem. In the interim, the portfolio will look nothing like what PIMCO was intended to do for the client once the derivatives are removed. You think the portfolio's duration is three when it now is six.”

    “On the fixed-income side, there are a lot more structural impediments because of the derivatives in their portfolios,” said Kevin Byrne, vice president, head of transition management at Fidelity Capital Markets, New York. “In the past, those complex derivatives would be liquidated by the terminated managers, and the transition manager would be left to transition the bonds. But that's changing.”

    Added Steve Kirschner, managing director and global head of transition management at Russell Investments, Seattle: “Gone are the days when transition managers came to the client with the cost of the transition and that was it. The assets used are far more complex.”

    And at a time when more asset owners are selecting transition managers from an approved list for specific tasks, those with the capability to handle derivatives “enhance their standing on the bench,” said Robert Holland, senior product manager at investment management software provider Linedata, Boston.

    Transition managers with such capability, according to industry sources, are BlackRock Inc., State Street Corp. and Russell Investments. One source who spoke on condition of anonymity said BlackRock is the top provider “and no one's close,” although he said its cost is “real expensive” compared to other providers.

    Looking for capability

    Executives at pension funds said the ability to handle complex derivatives is noted when selecting a manager from a pre-approved list to perform a transition.

    “If I had a PIMCO or a Western Asset as a manager, I'd want a transition manager with the capability to handle complex derivatives,” said William Atwood, executive director of the $14 billion Illinois State Board of Investment, Chicago.

    Mr. Atwood said the evolution of fixed-income portfolios — from comprising bond funds exclusively 20 years ago to having a mix of Treasuries, corporate securities and “any number of derivatives” today — has meant that shifting managers has changed dramatically. “It's a transition for everybody,” he said. “You used to say a fixed-income fund is a bond fund. That's not the case any more.”

    David Cooper, chief investment officer of the $29.9 billion Indiana Public Retirement System, Indianapolis, said managing the transitions of derivatives and swaps is “one of the many factors INPRS considers when hiring a transition manager.” Global Transition Solutions Inc., Russell and State Street are on the retirement system's list of transition managers from which it chooses on an as-needed basis.

    Even investment executives at pension funds with less complex derivatives in their portfolios “could understand where people would be concerned about” a transition manager's capability, said a public pension fund executive who asked not to be identified.

    Harbor Analytics' Mr. McLellan said that in the past, “index companies and some transition managers set up temporary assignments that removed larger risks in the portfolio while maintaining exposure without the full turnover associated with going completely passive. The benefits were obvious — do it very quickly, pay no transition management fee, it's a win-win.”

    “To me,” Mr. McLellan added, “it's evolved to where interim teams in transition management now have access to different products — swaps, futures, ETFs — with access to a variety of markets in the interim. Once they're hired, it's easy to transition through them. Flexibility, speed, lower cost — those are what's behind this. It's more about what asset owners are asking for. If a plan sponsor wants access to a new allocation, this is a quick way to do it. Some are comfortable with it, some are not. It's not so much for better transparency, it's really just a better mousetrap.”

    "Deeper dive'

    Linedata's Mr. Holland said transition managers with derivatives capability are better able to do “a deeper dive, and put more time and work into the transition” as opposed to leaving the wind-down of derivatives up to the terminated manager. “Transition managers with a specialty desk that will do all the hard and heavy lifting can take those illiquid assets, assess their risks, put a hedge around them to limit volatility and unwind them in a shorter period of time,” Mr. Holland said.

    Driving this trend, he said, is transaction cost analysis. Once focused more on equities, it's now made its way to fixed income. “A terminated manager might not be incentivized to get the best execution on those derivatives. Transition managers are more incentivized to do this with as little disruption as possible.”

    The trend toward derivatives capability among transition managers has dovetailed with fewer asset owners parking assets in index funds as an interim move between terminations and new hirings. Lance Vegna, Americas co-head of Macquarie Portfolio Solutions, the transition management business of Macquarie Group, New York, said firms use more exchange-traded funds and futures in transitions. “There's more transparency, more risk control, more flexibility in those other transition strategies than with index funds,” Mr. Vegna said. “Someone who wants $100 million in emerging markets equity exposure can get it right away in an ETF, while that's not so with separate accounts that can take weeks to establish.”

    Added Fred Fogg, co-head of Macquarie Portfolio Solutions: “I wouldn't label the shift away from index funds as much as a trend as it is a lot more best practice on the part of asset owners.”

    The effort to bulk up on derivatives in transition management comes at an opportune time, said Russell's Mr. Kirschner, as more asset owners consider changes in their overall fixed-income investments. “A lot of people were looking at PIMCO last year and were looking for a reason to move. But what (the PIMCO reviews) really did was give asset owners a reason to review their fixed-income investments,” Mr. Kirschner said. “There's been a trend in equities from U.S. to global strategies; there's been a mirror of that on the fixed-income side. There used to be a huge country bias among investors, but now they're looking for more yield, emerging markets debt, foreign currency portfolios. I don't think that's going to reverse anytime soon.” n

    Related Articles
    Transition management keeps shrinking
    Macquarie, Fidelity pushing into transition business
    Firms turning to overlays for transition management
    SEC files Wells notice against State Street
    Departure at Fidelity stirs speculation
    Illinois Teachers searching for pool of transition managers
    2 former State Street execs charged with fraud on transition management commiss…
    Japan's public service pension fund hires first transition managers
    Recommended for You
    Krishna Prasad
    Apex Group appoints its first head of U.S.
    Jesse Cole
    State Street names global head of private markets in asset-servicing unit
    State Street's BBH acquisition puts it at top
    State Street's BBH acquisition puts it at top
    OCIO, Anchor in Rough Seas
    Sponsored Content: OCIO, Anchor in Rough Seas

    Reader Poll

    May 23, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Crossroads: Politics, Inflation, & Bonds
    Credit Indices: Closing the Fixed Income Evolutionary Gap
    Forever in Style: Benchmarking with the Morningstar® Broad Style Indexes℠
    Q2 2022 Credit Outlook: Carry On
    Leverage does not equal risk
    Is there a mid-cap gap in your DC plan?
    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
    May 23, 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 © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 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
      • 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
      • 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
      • 2022 Innovation Investing Conference
      • 2022 Defined Contribution East Conference
      • 2022 ESG Investing Conference
      • 2022 DC Investment Lineup Conference
      • 2022 Alternatives Investing Conference