Transition managers have been among the few firms that have benefited during the coronavirus pandemic as institutional investors and money managers increasingly rely on their services.
The outlook for transition management services in Europe continues to be rosy because the pool of clients for these managers has been ever-increasing since the global financial crisis. Institutional investors that are switching to environmental, social and governance strategies — as well as defined benefit and defined contribution plans that are consolidating across Europe — need transition managers to help restructure portfolios.
While institutional investors are reducing the number of money managers running their investments to keep costs low, money managers themselves are increasingly outsourcing oversight of strategies and fund reporting, thereby expanding transition managers' businesses.
Consultants added that increased scrutiny on the money management industry from European regulators in recent years has also created new revenue streams. The U.K. Financial Conduct Authority's value reporting requirement, aimed at creating larger funds and therefore lowering fees for investors, is causing managers to merge their strategies. In 2019, several pooled funds had liquidity problems, sparking a flight to segregated accounts as investors were deterred by delayed redemptions.
Fast forward to 2020 and the coronavirus pandemic is causing investors to focus more on managing volatility, consider asset allocation changes and tweak risk profiles of their investments far more often than in recent years, sources said. The pandemic has really highlighted the value of transition managers when it comes to managing market volatility risk, said Artour Samsonov, head of transition management for Europe, Middle East and Africa at Citigroup Global Markets Ltd. in London, in a telephone interview.
Mr. Samsonov said the significant rise in volatility made it challenging to conduct transitions, but "we traded throughout the pandemic. The value of transition managers from a market risk management perspective is making sure that client remains invested throughout the transition," he added.
Chris Adolph, director of implementation services for EMEA at Russell Investments Ltd., based in London, added that transition management clients are increasingly discussing rebalancing portfolios. Mr. Adolph said investors have realized that if there is a second and third wave of virus infections or another market correction, many options strategies will be very expensive.
Mr. Samsonov added that EMEA clients are also lowering the risk profile of their investments, "for example, going from emerging market local currency debt into emerging market hard currency debt."
"We are (also) seeing more active-to-active equity portfolio changes rather than active to passive, which has been a dominant theme in past years," he said.
ESG investing is also boosting transition management businesses. Managers and investors facing additional burdens under upcoming disclosure rules in Europe are turning to transition managers to repurpose funds to meet new ESG standards. Investors have hired transition managers to put up filters on portfolios to achieve — for example — decarbonization of investments without reviewing the target exposure of each of the underlying managers.
One of the advantages of using a transition manager is to get accountability for performance during the transition rather than if the incumbent or target manager did the restructure, Graham Dixon, director of transitions at investment performance analysis firm Inalytics Ltd. in London, said in a telephone interview.
Mr. Adolph added, by way of example, that Russell managed changes for Central European money managers' equity allocations to include ESG in benchmarks. "This way the client gets the visibility as to what it cost them to do the benchmark change," while at the same time preserving performance, he said.