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.