Transition managers are seeing a business opportunity in the potential for a sudden rise in interest rates in the next year.
A leap in rates could make some corporate pension plans with liability-driven investing policies turn to transition managers for investment shifts to fixed income from equities, sources said.
"A short-term jump (in interest rates) might mean that everyone will want to derisk at once, with as much as $1 trillion being derisked at the same time," said David Wilson, managing director, head of institutional solutions group, Nuveen Asset Management, Chicago. "That could be chaotic. Having a transition manager to provide guidance would be crucial."
Some market analysts are warning of a sudden jump in interest rates, although the Federal Reserve's latest forecast in June showed expectations of only a quarter-point increase from the current benchmark overnight rate range of 1% to 1.25% by the end of the year.
Former Fed Chairman Alan Greenspan in an Aug. 1 Bloomberg interview warned a bond bubble is lurking.
"By any measure, real long-term interest rates are much too low and therefore unsustainable," Mr. Greenspan said in the interview. "When they move higher they are likely to move reasonably fast."
That scenario, sources said, could mean a sudden rush among many plan sponsors to shift assets to liability hedging investments — chiefly long-duration corporate fixed income — from return-seeking investments when they reach a particular funded status or interest rate trigger point on their LDI glidepath. That rush could mean a shortage of available long-dated bonds, requiring other investments like overlays and derivatives that transition managers use.
Sources for this story said transition managers are preparing for such a possibility and talking with pension fund executives about helping them move assets when triggers are reached.
"There are about 22,000 corporate plans in the U.S.," Nuveen's Mr. Wilson said. "Look at those plans with more than $5 billion in assets and especially the megasize plans with more than $50 billion. If rates rise substantially and many of those large plans in LDI reach their triggers around the same time — say, leading to a 10% move from equities to fixed income — that would be a significant shift in assets and might require a transition manager. A plan with $100 million in assets can do it through their LDI manager and wouldn't be as hard to do.
"I can see a definite opportunity for transition managers if these conditions are met: the size of the plan is so substantial that a transition manager would be needed to transition from one asset class to another, and if rates were to rise quickly," Mr. Wilson said.
Paul Sachs, Philadelphia-based principal at Mercer Sentinel Group, the asset-servicing consulting business of Mercer LLC, agreed there is "the potential" for transition managers to gain LDI-related mandates under those circumstances.
"LDI is not new news, but there's a wrinkle here," Mr. Sachs said. "There could be quite a groundswell in terms of derisking. I'm not clear if it will turn into transition manager mandates; in many cases, LDI transitions now are just cash redemptions from commingled equity funds to commingled fixed income. You would need triggers occurring at the same time among many plans, and then it would depend on the scale of the plans involved."