Transition managers' assets from U.S. pension funds declined 10% to 15% in 2013 as those clients managed more traditional investments internally, reduced the amount that's rebalanced, and increased their allocations to alternative investments.
That reduction, sources say, could become a long-term trend.
“The shifts point to the potential for a long-term structural decline in transition management business,” said Adam Sussman, New York-based partner at financial markets research and advisory firm TABB Group LLC. “For the remaining pools of transition management, there's more competition in the space, more pressure from regulators, more competitive fees. Across the board, it's not a great time to be in any business that's transition oriented.”
Added an investment executive at a public pension fund who spoke on condition of anonymity: “There probably aren't a lot of people moving money around. Big institutions are getting more sophisticated in how they do things. That has kind of marginalized transition managers.
“The long-term trend, over the last five years, is pension funds are bumping up their alternative investments, real estate, hedge funds — all stuff that's not going to transition managers,” the executive added. “Plus, the big guys (pension funds with more than $50 billion in assets) are doing this through their own trading desks.”
Although sources could not say how much U.S. pension funds saved in lower fees in 2013, they estimated a 10% to 15% reduction in assets transitioned in the year.
Nicholas J. Bonn, Boston-based executive vice president and global head of State Street Corp.'s portfolio solutions business, agreed transition mandates declined across the industry last year, “which we attribute to a continuation in a trend toward alternative investments. Additionally, the broad-based equity market rally in 2013 muted the differentiation between investment managers, resulting in fewer manager terminations and portfolio rebalancings.”