Transition Management 2022 Guide by SRP & FOW

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Transition Management Guide 2022 TRADING THE CLOSE Too good to ignore?

Covid-19 What shifts are here to stay? ALTERNATIVES BOOM

A special challenge

ESG THE TASK AHEAD

TRANSITION COMPLEX PORTFOLIOS SMOOTHLY WITH OUR GLOBAL TRADING EXPERTISE.

As market conditions fluctuate, trust the stability and execution capabilities of the Northern Trust team.

For more information visit northerntrust.com or contact: TR A N S ITI O N M A N AG E M E NT: EUROPE – Craig Blackbourn, cab18@ntrs.com US – Amanda Williams, atw1@ntrs.com ASIA PACIFIC – Mathew Cook, mc479@ntrs.com This material is directed to professional clients only and is not intended for retail clients. For Asia-Pacific markets, it is directed to expert, institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. ©2019 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. For legal and regulatory information about our offices and legal entities, visit northerntrust.com/disclosures. The Northern Trust Company (ARBN 126 279 918) operates in Australia as a foreign authorised deposit-taking institution (foreign ADI) and is regulated by the Australian Prudential Regulation Authority and the Australian Securities & Investments Commission (ASIC) (AFS License No: 314970). Northern Trust Securities LLP is registered as a foreign company in Australia (ARBN 165 830 937) under the Corporations Act 2001. Pursuant to current ASIC Class Order/transitional relief, Northern Trust Securities LLP is exempt from the requirement to hold an Australian Financial Services Licence (AFSL) under the Corporations Act 2001. Northern Trust Securities LLP is authorised and regulated by the Financial Conduct Authority under UK laws, which differ from Australian laws.

Contents 5: Homeworking and volatility Nearly two years from the start of the pandemic, the distinction between its permanent and its temporary impact on working practices and transition timing is becoming clear.

General manager Will Browne Tel: +44 (0) 20 7779 8309 will.browne@globalinvestorgroup.com Supplement editor Hugo Cox Tel: +44 (0) 20 7779 8728 hugo.cox@globalinvestorgroup.com Design and production Antony Parselle aparselledesign@me.com

12: Alternative facts | As alternatives allocations increase, the specific challenges posed by transitioning them are coming sharply into focus.

BUSINESS DEVELOPMENT Business development executive Jamie McKay Tel: +44 (0) 207 779 8248 jamie.mckay@globalinvestorgroup.com Sales manager Federico Mancini

18: A sustainable transition | The fast-expanding universe of ESG funds requires familiarity with a new set of assets and evidence of transition managers’ own internal ESG practices.

federico.mancini@euromoneyplc.com Head of sales, News & Insight Sunil Sharma Tel: +44 (0)20 7779 8556 sunil.sharma@totalderivatives.com Divisional director Jeff Davis Chairman Leslie Van de Walle

24: Trading the close | As trading conducted at or near the closing auction has increased, so have the potential benefits to a transition of participating, raising the thorny question of transparency.

Chief executive Andrew Rashbass Directors Jan Babiak, Colin Day, Imogen Joss, Wendy Pallot, Tim Pennington, Lorna Tilbian SUBSCRIPTIONS UK hotline (UK/ROW) Tel: +44 (0)20 7779 8999 US hotline (Americas) Tel: +1 212 224 3570 hotline@globalinvestorgroup.com

32: Pooling | The growing trend towards pooling in the UK and Australia poses specific challenges for transition managers while offering significant opportunities for them to add value.

RENEWALS Tel: +44 (0)20 7779 8938 renewals@globalinvestorgroup.com CUSTOMER SERVICES Tel: +44 (0)20 7779 8610 customerservices@globalinvestorgroup.com GLOBAL INVESTOR

38: Industry roundtable | Global Investor assembled the industry’s leading transition managers and consultants to a room in the City.

8 Bouverie Street, London, EC4Y 8AX, UK globalinvestorgroup.com Global Investor (USPS No 001-182) is a full service business website and e-news facility with supplementary printed magazines, published by Euromoney Institutional Investor PLC.

50: Directory | The contact details for the key firms in the transition management industry.

ISSN 0951-3604 Published in January 2022 © Euromoney Institutional Investor PLC London 2022

Transition Management Guide 2022

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When you’re striving to make your next transition the smoothest possible, no support short of the best will do. As global transition management and portfolio solutions specialists, we work with every client to design and implement unique solutions that not only help preserve asset value and manage risk, but also provide insight and guidance throughout the life of every project.

Transition Management Europe +44 (0) 20 7986 0611 Americas +1 212 723 4181 Asia +613 8643 9779 globaltm@citi.com

WHEREVER YOUR NEXT MOVE TAKES YOU.

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COVID LEGACY

Homeworking and volatility: a Covid legacy Nearly two years from the start of the pandemic, the distinction between its permanent and its temporary impact on working practices and transition timing is becoming clear.

he success of financial firms in shifting to distributed working, including a workforce operating entirely or mainly from home, was a striking feature of 2020. Today, nearly two years after the pandemic closed offices across Europe and North America, and longer still since Asian working practices moved from the office to the home,

Transition Management Guide 2022

the lasting effect of new working practices on how transitions function, and the relationships between managers and clients, is becoming clear. Meanwhile, the volatility that became a feature of the pandemic outbreak and governments’ responses has continued this year. As the global economy roars back to life,

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Independent & bespoke transition advice

Transition Management can be a complex and challenging process, resulting in significant costs and risks. At MJ Hudson, our experienced advisers help reduce transition risk and provide true transparency by giving you independent, regulated and practical advice on all aspects of the transition process including:    

Planning – optimal routes, structures, timings Independent transition manager selection Event oversight Independent cost / risk analytics

For more information please contact: Steve Webster | Director Transition & Trading Solutions +44 20 7079 1000 steve.webster@mjhudson.com

MJ Hudson provides investment consulting and independent advisory services to a diverse range of asset owners & investors. Our services include Manager Selection, Transition Advice, Operational and Investment Due Diligence, Investment Strategy and Allocation Advice.

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COVID LEGACY

Covid’s disruption of the global supply chain has created inflation around the world. This has added uncertainty to investors wracking their brains over what an end to economic support measures like furlough schemes will means for asset prices.

Face-to-face, there is a lot more collaboration. Customers now know that channels of communication are more open; there is more willingness to get together on a video call.

Launch video One feature likely to endure any future widespread return to the office is the shift from telephone and in-person meetings to video calls for most contact between clients and transition managers. These provide a richer environment than conference calls and are more efficient than a physical meeting. Andy Gilbert, EMEA head of transition client strategy at BlackRock, says that the growth of video calls has engendered a closer working relationship between client and transition managers. “Face-to-face, there is a lot more collaboration. Customers now know that channels of communication are more open; there is more willingness to get together on a video call,” he says. Video works well for the closer collaboration that clients have sought since last spring. “It has expanded the range of questions that clients can ask and helps satisfy, in many cases, their own need to communicate with internal stakeholders more proactively when teams are working from home,” says Amanda Williams, regional practice lead for the Americas at Northern Trust in Chicago. “You see an uptick during the transition event [in particular]. Clients are seeking more visibility and transparency than they had in the past, there are more touch points during the day; they want information to be provided faster and more frequently,” she says. Williams believes video calls have helped forge a more collaborative working approach by the experience of members of the client

Transition Management Guide 2022

Andy Gilbert, EMEA head of transition client strategy, BlackRock

and manager team seeing each other’s home environment, and in some cases their children or pets. “Being online has helped us created better relationships with clients: we are talking with them more often,” says Neil Miller of Inalytics. Chris Adolph, director of implementation services, EMEA, at Russell Investments, agrees that transition managers are providing a more constant source of advice, particularly in light of current volatility. “It’s almost a quasiconsulting role we are playing in respect of volatility and its impact on costs, which could mean delaying a transition,” he says. In some cases, remote working procedures mean some operational elements on the client side are taking longer. “We now see Investment Committee meetings being held remotely, and where normally that might see key investment decisions signed off there and then, the remote nature of these meetings means decisions are taking longer. Key transition documentation can also take longer to be signed off, and it’s not so easy to meet someone at the drop of a hat, especially if they are not back in the office. All this tends to increase the lead times for transition planning,” says Paul McGee, head of Macquarie Capital’s transition management and portfolio solutions group in London.

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COVID LEGACY

have focussed their first trips on missioncritical service providers such as custodians, administrators and legal advisors. Since transition managers are generally based in the same locations, they catch the client on the same trip. “We’ve seen this a lot: the major cities where transition providers are located are the major ones where asset owners are doing their reviews now. The bigger clients will still want to make those trips. They want to see the offices, see the compliance and the risk teams. If they have a large amount of money with a fund manager or custodian, they have responsibilities to ensure their assets are safe,” says James Woodward, head of portfolio solutions, Asia Pacific at State Street. The return to in-person meetings has considerable benefits, according Woodward. He points to the complex discussion topics that benefit from face-to-face meetings, including those required for wholesale changes in asset allocation, restructuring of investment managers or mergers, such as those between superannuation funds in Australia or around LGPS in the UK. “Where a transition is very straightforward, face-to-face meetings can be avoided. For larger ones that are more complex, [the industry has] proved we can do them remotely. But if there is a whiteboard it will be quicker,” he says. As more frequent travelling returns, meanwhile, there may be competitive disadvantages for those who choose not to resume it when competitors are ready to put in the miles – and the hours – to build rapport. The return to in-person meetings has considerable benefits, however. Williams of Northern Trust suspects that travel will be more important for sales teams in some jurisdictions than others. “Perhaps in some

Key transition documentation can also take longer to be signed off, and it’s not so easy to meet someone at the drop of a hat. Paul McGee, head of transition management and portfolio solutions, Macquarie Capital

Working arrangements differ considerably from company to company – both for clients and transition managers. “Different firms have taken different views on working from home; in some firms teams are back to the office full time. At certain companies you need a special exemption to work at home now; at the other end of the scale are companies for whom homeworking is the new normal,” says McGee. Travel resumes When it comes to face-to-face meetings, transition managers have benefitted from the tentative return of international travel. Clients

Transition Management Guide 2022

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COVID LEGACY

countries in Asia – where they might have one or two sovereign funds – you will still be rewarded by making trips that competitors don’t,” agrees Woodward. The trouble with homeworking Despite the immediate benefits conferred by the shift from phone to video calls, the longer-term challenges of homeworking are now also becoming clearer. These owe in part to the huge variation in how people experience it. Gone is the homogeneity of the single integrated working environment, in which everyone from the CEO to the most junior backroom staff walk the same corridors to similar desks. The quality – and the impact – of homeworking varies hugely with where you live, how old and how affluent you are. Those enjoying used of roomy detached homes in the suburbs outside London or New York will have experienced the pandemic very differently from young hires in Asia, living three or four to a small apartment. In general, the process of finding your feet for younger hires has been tough this year, says State Street’s Woodward. “For the new staff, especially younger ones, coming into the offices brings benefits. We had someone new to the transition industry start in September in Singapore and it was beneficial to get them into the office.” Mathilde Richardot, portfolio transition solutions at Goldman Sachs, says that homeworking disrupts many of the cultural practices that companies had taken for granted and that they must continue to supplement it with the chance for people to meet in person. “For a business like ours which is based on an innovative, collaborative and apprenticeship culture, home working is not ideal as a new normal. We have ensured that

Transition Management Guide 2022

The major cities where transition providers are located are the major ones where asset owners are doing their reviews now. James Woodward, head of portfolio solutions, Asia Pacific, State Street

new joiners to the transition team had the requisite flexibility but didn’t miss out on direct contact and direct mentorship,” she says. Volatility: another new normal This year has done little to dampen the volatility heralded by the pandemic, which became a defining feature of transition conditions in 2020. Growing inflation and the pressing questions of when, how and how fast huge fiscal and monetary support – put in place by governments across the world to soften the economic damage wrought by Covid – would be withdrawn, have kept investors guessing. With shorter duration bond prices falling as

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COVID LEGACY

challenging since rapid growth in the market capitalisation of the leading US technology firms has left many large cap portfolios highly concentrated. “It’s not uncommon to see a very concentrated stock list, where FAANG [Facebook/Meta, Amazon, Apple, Netflix and Google/Alphabet] names, for example, create very sizeable individual stock positions – five years ago an index-replicating portfolio looked different. Today, stock and sector specific risk is much more pronounced,” says McGee. Despite the high liquidity in these stocks, volatility remains a challenge, he says. “Stocks moving in double-digit percentage points on a given day can give you a very different outcome to your transition. The result is a requirement for a carefully considered trading strategy, and much more frequent communication between the transition manager and the client, he says.” “From a transition perspective, in the postpandemic cycle with its potential for higher inflation, we expect the right asset mix to be less clear. According to Goldman Sachs research, the pressure for higher equity allocations will persist. The correlation between equities and bonds may weaken and bond returns are likely to be lower versus both equities and cash, and rates volatility might be higher in the new cycle,” says Richardot. Gilbert of BlackRock agrees that, as asset owners consider the prospects for inflation a shift towards portfolios that offer greater protection could be a feature of the next year. “Particularly if they have significant liabilities, this could be an interesting trend.” “If we’re moving into this transitionary period of higher inflation and changes in central banks’ policies, the markets may not have fully adjusted, so there is more factor volatility, making transition managers’ models

The correlation between equities and bonds may weaken and bond returns are likely to be lower versus both equities and cash, and rates volatility might be higher in the new cycle. Mathilde Richardot, portfolio transition solutions, Goldman Sachs

investors prepare for interest rises, there have been plenty of recent shocks. These included the market startle that followed the Bank of England’s decision not to raise rates in early November, which saw the sharpest move in many bond prices for years. In equity markets, inflation prospects signal a discount of future earnings, raising questions about how far the decade-long dominance of growth stocks can last. This is all the more

Transition Management Guide 2022

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COVID LEGACY

– which typically employ back-testing over 60 or 90 days, less precise,” says Artour Samsonov, head of transition management and investment solutions at Citi in London. “Since your market environment can change from day to day, it’s harder to accurately estimate the cost of a transition. In such an environment you have the twin challenges of managing transition risks and managing clients’ expectations,” he says. In some cases – such as where the transitions remain in the same or a similar strategy within the same assets class – recent volatility has seen transitions delayed. “If it was costing two or three times the amount to get out from that client [than the anticipated performance loss] then, in isolation, the decision might be no,” says Adolph. Clients’ approach to a transition shapes the parameters for this decision. “The timing of some transition events can be locked in from a long way out. So, while we might slow down or accelerate the trading aspect [clients] still will go ahead regardless. Other clients decide to hold back, and together we watch and report on market conditions from day to day in the lead up to deciding when to commence trading,” says McGee. He says that in general there has been a shift towards building in the option to delay or halt a transition more than previously. “This comes to the fore especially with more extensive planning, which must now inform this type of decision making.” BlackRock’s Gilbert says that any hesitancy that was a feature of the pandemic has receded. “Asset owners have caught up. The world keeps turning: if you are a pension fund, you still have pensioners to pay. Just because there’s a pandemic, these requirements don’t stop.” Adolph points to a growth in interim management. Where an asset owner has

Transition Management Guide 2022

Just because it’s relatively expensive, it doesn’t mean it’s the wrong thing to do. Chris Adolph, director of implementation services, EMEA, Russell Investments

decided it wants to redeem from a legacy manager but hasn’t yet decided where to re-allocate the assets it may now ask the transition manager to hold assets for a couple of months while a decision is made about where to re-allocate. For the most part, though, where clients are shifting asset class and the opportunity costs entailed by delays may be larger, they have tended to bite the bullet, he says. “Just because it’s relatively expensive, it doesn’t mean it’s the wrong thing to do.”

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GROWTH OF ALTERNATIVES

Alternative facts

As alternatives allocations increase, the specific challenges posed by transitioning them are coming sharply into focus.

n search of greater diversification and better yields, pension funds and other asset owners have been expanding allocations into alternative assets classes in recent years. The trend is set to accelerate: led by flows into private debt and private equity, total global AUM in private assets grew from $10.7 trillion in 2020 to $11.8 trillion in 2021, and will reach $17.2 trillion by 2025, according to Preqin. In the UK, LGPS schemes have been active players driving the growth in demand for alternatives. As open schemes, whose extended liabilities deliver a funding challenge, this asset class is particularly valuable. “They are in a situation where they are constantly thinking about long-term returns and are turning more to illiquidity premium to achieve this,” says Steve Webster, direct of transitions

Transition Management Guide 2022

and trading solutions at MJ Hudson. Platforms, too, are entering the sector. “Retail platforms have a number of considerations that can often lead to the restructure of assets such as: is their customer proposition competitive, does it provide something unique, is this being offered in an efficient way and is the best way to provide this proposition by outsourcing mandates or manage them in-house,” says Andy Gilbert, EMEA head of transition client strategy at BlackRock. The growth of secondary issuance, private debt and private equity has shifted the liquidity profile of many asset owner portfolios. “The shift to real assets has expanded the complexity and number of asset classes within the scope of a transition, moving these beyond the traditional equity and fixed income

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GROWTH OF ALTERNATIVES

landscape. This brings a new complexity to the question of how you manage the risk during the transition,” says Chris Adolph, director of implementation services, EMEA, at Russell Investments. Growing allocations to alternatives have focused the attention of clients and transition managers on interim management. The large spreads and higher volatility of alternatives portfolios make the cost of being out of the market much higher than for more traditional mandates. “Clients may need interim solutions to bridge the timing gap between moving funds away from a legacy portfolio and toward an alternative investment,” says Amanda Williams, regional practice lead for the Americas at Northern Trust in Chicago. Savings of a well-executed transition, meanwhile, including transitioning in specie rather than via cash, may be several per cent. For those shifting as part of pooling they may be equivalent to multiple years of cheaper management fees achieved by shifting the alternatives mandate to a pooled vehicle (see page 14 Alternatives and pooling).

Retail platforms have a number of considerations that can often lead to the restructure of assets. Andy Gilbert, EMEA head of transition client strategy, BlackRock

community launching a wide range of new funds, for example Paris-aligned benchmarks and climate transition benchmarks,” he says. A launch requires a time-intensive planning process. There are a host of legal hoops to jump through and regulatory approval is needed before the fund is ready to launch. Operational requirements – involving fund accountants and custodians – are also more onerous. “Then there are questions of how and when seed money will be committed, how many managers are involved with a launch and who gets which allocation. It all results in significant transition lead times,” says McGee. “And for every fund that is launched there are probably five that should be shut – either they are tracking yesterday’s benchmark or they

Launches grow As the demand for alternatives mandates increases, managers are being recruited to facilitate a growing number of fund launches in private equity or multi-asset strategies, compounding a similar trend for ESG funds. This is adding workload and challenges specific to these sectors. Paul McGee, head of Macquarie Capital’s transition management and portfolio solutions group in London says niche sector requirements are coming from a range of participants. “As well as a raft of fund launches by the local government pooling entities, you also have the regular fund management

Transition Management Guide 2022

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GROWTH OF ALTERNATIVES

Structural limits “Certainly, there is a role for the industry to play to help those investors but structural factors make it challenging – assets that price only on a quarterly or even an annual basis, for example,” says Craig Blackbourn, EMEA head of transition management at Northern Trust. “Transitions are efficient on two-sided trades within the same asset class – or at least related assets – where a manager can gain better access to liquidity. But where assets are illiquid, such as bank loans, it is very hard to transfer from one entity to another,” says Cyril Vidal, head of portfolio transition solutions at Goldman Sachs. Transition managers unable to buy assets like bank loans on behalf of customers, may need to reach beyond their usual skill set to find proxies to manage the risk, helping clients shift up the liquidity spectrum as the cash call approaches, such as by providing beta exposure to the target portfolio using synthetic products. “You can look at the transition as a whole, undertake the risk management and the cash flow management, but when there are asset classes where you cannot implement, like bank loans, transition managers will have to develop systems to accommodate that,” says Dixon of Inalytics. A degree of flexibility will be familiar to pension funds, who face a similar requirement in meeting payment obligations to their members at stipulated, predictable times reaching far into the future. They prepare for these events by cycling through different assets with differing liquidity, return and risk profiles. “Clients who pay pensions [are familiar with] working on reducing the cost of raising that cash,” says Adolph of Russell Investments. The issues will also be familiar to those who have handled the growing allocations to emerging markets in recent years, where

Clients may need interim solutions to bridge the timing gap between moving funds away from a legacy portfolio and toward an alternative investment. Amanda Williams, regional practice lead for the Americas, Northern Trust

have a tenth the AUM they once had. We’re seeing a lot more that,” says Graham Dixon of Inalytics. Advice regarding alternatives transitions has become an increasing part of the work of consultants. But when it comes to more complex transitions the structure of private markets imposes limits to what transition managers can offer. For fixed income securities there may be dark pools where transition managers can find liquidity, but for less liquid assets like property establishing an accurate price is much harder.

Transition Management Guide 2022

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GROWTH OF ALTERNATIVES

transition managers must wrestle with local regulations limited by regulation about what they can own on behalf of the client. Mandate terms from alternatives managers add to the challenges, with infrequent opportunities to purchase or redeem. “There are operational challenges to the process of purchase and redemption, which are controlled by the governance document, so it’s hard for transition managers to time the clients in and out. A fund might open their buy in period for a week a year; the GP might be required to approve all redemptions,” says Williams. Improving timing Despite the restrictions imposed by the types of assets that alternatives mandates contain, and the conditions imposed by those who manage them, transition managers still have plenty to offer. Timing the shift of assets to best benefit the client is one area of focus. “We have the means to ensure the rotation is as clean as it can be, managing the exposure risk as far as is possible and ensuring the cash is ready on the day that it is called for. The client will have to decide which mandates to reduce, but the transition manager can run appraisals [to inform that] and monitor the liquidity of those portfolios, weighting execution as close as possible to the call date and employing futures to sell forward,” says Blackbourn. In theory, transition managers can help position client portfolios for allocation to alternative mandates by replicating target exposure. However, in practice Artour Samsonov, head of transition management and investment solutions at Citi in London, says he has few requests to conduct this type of exposure management. “Hypothetically, clients would want to be in target exposure right anyway,

Transition Management Guide 2022

Where assets are illiquid, such as bank loans, it is very hard to transfer from one entity to another. Cyril Vidal, head of portfolio transition solutions, Goldman Sachs

but many clients I talk to are typically happy to remain invested in legacy mandates until they are ready to allocate to alternative mandates. They choose to liquidate legacy exposure in stages to fund target alternative mandates directly.” He still believes transition managers can help clients remain invested as much as possible in cases where the legacy portfolio is illiquid and will take many weeks or months to liquidate. “Where a client is liquidating legacy assets and raising cash steadily at a rate of $2m per day to meet a total allocation of $30m for example, the transition manager could reinvest cash in more liquid securities like ETFs, futures or

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GROWTH OF ALTERNATIVES

other passive instruments to maintain exposure before funding the alternatives mandate,” he says. In general, then, as clients look increasingly to transition managers for support with alternatives portfolios, the latter are shifting their service. Increasingly, clients are looking beyond pure trading capabilities, which many

not be their only – or even their main – focus in selecting a transition manager. Rather, as transition managers become more active partners for clients to manage the liquid assets in a client’s portfolio they are also being asked to project-manage the assets that don’t trade on exchange. With alternatives’ higher volatility

Alternatives and pooling

lternatives are a particularly important target for pooling because, with fund fees higher in this sector than traditional strategies, pension funds stand to gain more in cost savings by collecting together. While these allocations are increasing in size, they still sit at the margins of many pension portfolios. Running small portfolios via segregated accounts creates a lot of work for investment managers, especially since many have been used to running larger segregated portfolios prior to the current vogue for alternatives began. Much of this work is administrative: handling assets that are often challenging to custody or administrate, such as such as emerging market credit or private equity, in remote and unfamiliar markets. Relatively high management fees, which reflect in part this more complex burden placed on the investment managers, are all the more corrosive of asset owners’ returns given long lock-up periods. The long investment horizon necessary for illiquid strategies like private equity, mean investors may not be able to get their money out for 10 or 12 years after they put it in, with fees accumulating all the while. It likely is that the growth of pooling will increase asset owners’ focus on what transition managers can offer, and how each

Transition Management Guide 2022

offering distinguishes itself, evaluating how far the transition manager’s experience fits the specific needs of the portfolio in question. “It’s about the depth of capabilities – having capacity in trading but also understanding liquidity in those asset classes. The transition managers might be great at trading equities but 40% of a portfolio might be in fixed income,” says Gilbert of BlackRock. Transition managers have performed an important function transitioning LGPS assets into pooled management. However, there is a sizeable remaining alternatives portion of LGPS partner funds yet to be transitioned which may provide an important role for transition managers. Whereas a large part of the LGPS pooling transition activity has required little in the way of new innovation or solutions, the pooling of alternatives presents a potential opportunity to excel, according to Steve Webster, director of transitions and trading solutions at MJ Hudson. “[The next stage] will allow people to see the best of transition managers,” he says. “For some, transition management might be seen as operational nice-to-have, but there is potential for it to deliver significant cost and risk reduction. After all, the proposals submitted by pool operators at the outset of pooling, to the Department for Work and Pensions, identified the biggest single expense

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GROWTH OF ALTERNATIVES

increasing the penalties associated with being uninvested in these transitions, the associated high costs are likely to continue to focus the minds of both clients and managers here. The alternatives stage is one on which transition managers will increasingly be required to distinguish themselves.

as transitioning the assets.” Alternatives pooling also provides complex operational challenges for pooling operators. Consider the case of a local government pension fund with a 10% stake in an early vintage private equity fund. From the local authority’s point of view, the ideal solution may be to combine that share of the fund into a single co-mingled vehicle where it is joined by all the other assets managed by that fund manager. In theory co-mingling existing stakes is possible; in practice the challenges are extensive, requiring gradual transition from maturing LP stakes into newly launched alternative co-mingled vehicles provided by pooling operators. The timing of cashflows between old and new funds rarely match since allocations to alternatives are growing faster than any other asset class, which in turn slows deployment. This creates an increasing overhang of alternatives allocation waiting to be drawn. In many ways this money is in transition, raising issues familiar to those providing interim investment solutions, such as managing exposure risk, hedging, liquidity and cashflows, Consider a client invested in a range of listed asset classes that are destined for deployment into a number of alternative investment

Transition Management Guide 2022

[The next stage] will allow people to see the best of transition managers. Steve Webster, director of transitions and trading solutions, MJ Hudson

vehicles. When the call comes for funding, how does the client determine what balance of assets to liquidate verses what to retain? “Clients need help to understand what to liquidate and when. How much should you take from the global equities portfolio, how much from your global credit? All the time you are trying to balance the residual risk in your listed assets with that of your outstanding private asset commitments,” says Webster.

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ESG

A sustainable transition The fast-expanding universe of ESG funds requires familiarity with a new set of assets and evidence of transition managers’ own internal ESG practices.

s asset owners, managers and investors seek out ESG mandates with unprecedented speed, what they ask of transition managers is shifting. “The trend is seismic, pension funds are under pressure from regulators and underlying beneficiaries, requiring that plans adhere to Paris accord [targets]. With this growing ESG tilt, we’re seeing a lot of custom benchmarks being created,” says Craig Blackbourn, EMEA head of transition management at Northern Trust. The broader preoccupation with ESG may

Transition Management Guide 2022

be short-lived, according to David Edgar of Inalytics. “There’s a battle for who defines and supplies the ESG benchmark data, but in three years ESG compliance will be a given and people will be talking about the next thing. For transition managers, the questions remain the same: what does the portfolio this fund will hold look like. Once the fund is approved, it’s just another transition.” However, the ESG universe has distinctive features that managers must grasp and stay abreast of. “It’s not just about de-risking, or changing a

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ESG

manager because they have either been outor under-performing. Rather, ESG is a separate theme that clients are changing portfolios around. If you’re talking low-carbon, I need to know what level of retention a low-carbon index has as against the wider index. It’s got to become part of what we intuitively know and understand,” says Andy Gilbert, EMEA head of transition client strategy at BlackRock. “ESG fund launches, as well as transitions into existing ESG strategies, tend to involve heavily concentrated portfolios, with significantly sized illiquid stocks, as well as in-vogue managers that feature time and again. All this means these transitions require very careful consideration to ensure we are employing an optimal trading strategy,” says Paul McGee, head of Macquarie Capital’s transition management and portfolio solutions group in London. Conversations between transition managers and clients focus on the larger tracking error typical for ESG funds. They will likely contain a larger number of small cap names than an unconstrained global equities portfolio, meaning higher risk, a larger deviation of returns and different sector and country concentrations – all shifting the liquidity profile of a transition. With ESG, mandates are typically more concentrated, just like with high conviction non-ESG managers. So, diversifying beta risk using futures is harder. “A lot of the

A lot of the risk is stock specific rather than market or currency risk. Chris Adolph, director of implementation services, EMEA, Russell Investments

risk is stock specific rather than market or currency risk,” says Chris Adolph, director of implementation services, EMEA, at Russell Investments. A close eye Transition managers may not be part of ESG portfolio selection, but increasingly clients are looking to their transition managers for ESG analytics, adding ESG lenses to portfolio analysis. “By comparing their portfolios against key carbon metrics, carbon intensity levels and net-zero commitments, clients are equipped to understand their portfolio risks and opportunities from a carbon perspective and make tangible adjustments in their portfolios toward de-carbonisation,” says Mathilde Richardot of the portfolio transition solutions team at Goldman Sachs. With demand for ESG funds growing from a range of participants, transition managers face specific operational challenges. “ESG by its very nature is evolving. Clients are looking to evolve their investment management mandates to incorporate ESG, and this now includes UK local authorities and wealth management platforms. Some of those platforms will be operating pooled fund structures that could be domiciled in parts of Europe such Dublin or Luxembourg. They may or may not fall under UCITS guidelines and potentially would be covered by SFDR,

It’s got to become part of what we intuitively know and understand. Andy Gilbert, EMEA head of transition client strategy, BlackRock

Transition Management Guide 2022

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ESG

In addition to meeting these operational and regulatory requirements, transition managers may provide an extra layer of operational oversight to check ESG parameters hold between one manager and the next. Specifically, they can ensure that the target manager doesn’t buy something that is on a client’s exclusion list – or which takes the portfolio over allocation or concentration limits. “The risk is greatest where target managers have a number of segregated mandates for different clients, all with different client-specific exclusion lists and allocation limits,” says Artour Samsonov, head of transition management and investment solutions at Citi in London. Providing such services is complicated. A lack of unitary measurement frameworks for ESG means that the universe of ESG stocks is always changing: a manager who thinks he has a good grasp of it from a number of transitions might find something very different in the next one. Blackbourn gives the example of a middle eastern client who changed the vendor it used to provide its ESG screening. “When the vendor changed, so did the screening ratings,” he says. Adolph places the ESG shift within the wider trend of clients expanding the range of assets to which they are seeking access, with multiasset and private portfolios – as well as other illiquid alternative products – take a growing share of the pie. In all cases, the onus is on transition managers to prove they are familiar working in whatever pools they are being asked to handle. Graham Dixon at Inalytics says ESG shifts are likely to become increasingly common for DC pension funds, who may use master trusts, creating limits to how much transition managers can offer. “There may not be much trading to execute. Clients will want to see

The risk is greatest where the target managers have a number of segregated mandates for different clients. Artour Samsonov, head of transition management and investment solutions, Citi

including the taxonomy that comes out in January,” says Gilbert. These may intensify when it comes to interim management. “When it comes to interim management, as soon as you have a degree of discretion over portfolio construction then you’re in a different segment of ESG. You no longer rely on the target manager’s wish list and you must be attentive to that. The client needs to know if and how the interim manager is approaching ESG considerations – particularly, if SFDR is part of the client’s regulatory regime,” says Gilbert.

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ESG

It’s about your policies around human and social capital, your environmental footprint, your compliance, risk excellence and standards of conduct. James Woodward, head of portfolio solutions, Asia Pacific, State Street

what they are getting; it may be harder to be paid for the service provided,” he says. Wherever the focus of ESG transitions, it is crucial that clients leave their conversations with transition managers with a clear understanding of where and how an ESG transition is different, says Adolph. “It’s about quantifying the risk in beta terms and talking about how we will address that.”

policies around human and social capital, your environmental footprint and the policies created around compliance, risk excellence and standards of conduct,” says James Woodward, head of portfolio solutions, Asia Pacific at State Street. That means responsibilities when it comes to vetting supply chains. This may be no mean feat: agency providers may pick from more than 100 counterparties and venues in the course of a transition. Increasingly, those operating an agency model are seeing ESG requirements expand around the brokers they use. “We’re seeing more RFPs asking questions related to ESG, as clients seek to understand how we can support their desire to influence change,” says Williams.

In-house ESG As part of RPFs, transition managers will increasingly be called upon to demonstrate their own ESG credentials. Asset owners the world over are becoming attuned to the fact that their suppliers comprise a vital constituent of their ESG footprint. Requirements for transition managers to demonstrate credentials in specific detail – including those of their own suppliers and technology partners – are therefore likely to increase. “It’s about you as a company, your

Transition Management Guide 2022

ESG and pooling The growing availability of ESG funds among pooled providers – partly a function of growing

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ESG

demand from local authorities – provides another important source of demand. “ESG mandates are becoming a popular pooling offering, indeed for some pooling operators they are becoming the foundation of the total offering,” says Steve Webster, director of transitions and trading solutions at MJ Hudson. “That said, given the myriad of ESG investment offerings and benchmarking we may see some delays in pooling, since some local authorities require a different flavour of ESG to what the pooled products currently offer.” “Either way, as we move forward, these transitions, which have active constraints, will be more challenging that the typical capweighted passive mandates. This presents higher than expected costs and risks,” he says. ESG is a crowded trade, with a high concentration of participants buying leaders and selling laggards. The scenario is familiar one for transitions managers, given the proclivity of transitions to feature moves from underperforming managers and sectors, where demand is low, into better performing ones, where demand is high. “It may be that your increased drive to ESG is following the same ideas at the same time as everybody else: you’re potentially chasing the same objectives and as such some elements of ESG investing may present a crowded trade,” says Webster. “By the time we’re involved, the client board and pension committee have decided on [the allocation]. What they get from upfront analysis [from us] is information about which stocks present the liquidly challenges. The tech firms, the electric car makers – are certainly crowded trades,” says Craig Blackbourn, EMEA head of transition management, Northern Trust. While it is growing fast, the ESG universe

Transition Management Guide 2022

of stocks is still small, meaning that the tools to mitigate risks, notably indexes with deep liquidity, are less available or absent entirely. Just as asset owners are seeking new ESG indexes, and the managers likely to perform best against them, they are also increasingly seeking out those transition managers who can evidence their skill in these particular pools of assets. Transition managers will also have to prove their own ESG credentials. This mean meeting the financial disclosures requirements of SFDR, which includes detailed sections to report around sustainability. It also means meeting clients’ own requirements for ESG in their supply chain.

Distribution: ESG and beyond

SG is not the only emerging fund class that calls on transition manager’s skill. As investment managers seek a wider market for their products, they are fitting strategies into a range of regulatory wrappers for different jurisdictions, designed to provide investors with the most tax efficient access. “UK, Irish and Luxembourg versions of the same fund are launching; you have to act within those regulatory boundaries required by, for example, a UCITs fund,” says Graham Dixon at Inalytics. Well prepared transition managers will adapt their systems to these constraints ensuring that UCIT or AIFMD requirements can be met. Multiple jurisdictions and fund types also complicate getting hold of legacy portfolio assets, thanks to contrasting settlement cycles. “For a hedge fund transition, the target manager might want the assets on T-1, but the legacy managers might not give them up until T+10,” says Dixon.

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State Street Global Markets

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TRADING THE CLOSE

Trading the close: too good to pass up? As trading conducted at or near the closing auction has increased, so have the potential benefits to a transition of participating, raising the thorny question of transparency.

hanks to a boom over recent years in passive portfolios, whose managers rebalance at the end of each day, the close of day auction now comprises 20% to 30% of daily equity volume in many markets. “The closing auction has become a hugely significant liquidity event with active traders joining the rise in passive flow which has traditionally been done at the close. There is

Transition Management Guide 2022

a well-defined, transparent price discovery mechanism and a lot of historical data to leverage. This can allow for a portion of trading and risk to be taken off the table at a single point in time, seemingly without any spread or impact,” says Paul McGee, head of Macquarie Capital’s transition management and portfolio solutions group in London. Fixed income is seeing a similar effect.

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TRADING THE CLOSE

The closing auction has become a hugely significant liquidity event. Paul McGee, head of transition management and portfolio solutions, Macquarie Capital

volatility – perhaps a quarter of that of the beginning of the day – and higher correlation – typically five-to-six times higher, especially in periods of crisis,” says Michael Steliaros, global head of quantitative execution services at Goldman Sachs. But taking advantage of late-in-the-day or end-of-day liquidity creates a conundrum when it comes to measuring the costs of a transition, using the classic benchmark of implementation shortfall. In particular, when the benchmark used for the event shortfall is the closing price, trading prior to the close will always show up as zero – or even a minus cost. “With the increasing share of liquidity in the closing auction versus continuous trading, the relative benefits of using an implementation shortfall benchmark could be called into question,” says Vidal “Say I buy 10% of the day’s volume at the close, then compare my transition using the resulting closing price as my benchmark. I can only have increased the price by my buying activity, but none of this impact will be recorded,” says Steve Webster, direct of transitions and trading solutions at MJ Hudson. “If you trade and measure your transitions at the close, the implementation shortfall will always be zero. I could have paid a huge premium for transitioning but it will never show up as a cost. I’m gaming the [cost] measure.”

“On the fixed-income side, the growth of passive investments has encouraged the development of trade-at-close functionalities. Combined with the efficiency of portfolio trading, which enables significant risk transfer at a single point-in-time, the end-of-day is increasingly becoming a natural benchmark for implementing transitions efficiently,” says Cyril Vidal, head of portfolio transition solutions at Goldman Sachs. Trading volumes are increasing prior to the close, too. “The increase toward the end of the day is associated with tighter spread, lower

Transition Management Guide 2022

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TRADING THE CLOSE

to execution strategy rather than be pro or against any one option, like execution on the close,” says Artour Samsonov, head of transition management and investment solutions at Citi in London. “The trade strategy needs to consider transition profile in terms of risks and liquidity in the context of current market environment. Let’s be honest, nobody dumps the whole trade on the close - no client I know would ever agree to that”

I could have paid a huge premium for transitioning but it will never show up as a cost. I’m gaming the [cost] measure. Steve Webster, director of transitions and trading solutions, MJ Hudson

Hazards of a ban Preventing transition managers from trading the close outright is a poor solution to the problem since it fences off a vital source of liquidity that could significantly reduce the total cost of a transition. “In most global transitions, executing a very liquid slice at the close can help mitigate overnight risk or manage regional imbalances without compromising the transparency of the performance measurement,” says Vidal. Ignoring the close may see major opportunities missed. “On a day you were trying to sell a large holding that added real risk to the transition – sure enough, 10 million shares went through at the close and we had to stand and watch. However, participation which disguises performance is difficult to justify,” says Webster. Setting a transition’s benchmark using the closing price without trading puts the transition manager at an immediate disadvantage. “By using last night’s closing price, you immediately create a slippage from the gap between the market close and its subsequent opening. As a transition manager it is important to identify these risks and, where possible, manage them,” says Webster. “Nowadays, we execute for clients across various benchmarks, not just implementation shortfall. It makes sense to maintain flexibility and offer options to clients when it comes

Transition Management Guide 2022

Hazards of trading the close Besides the issue of measuring its impact on prices, trading the close also comes with other hazards. One concerns transitions that take in multiple time zones. “Say you have a big net sell in Asia and a big net buy in US: the client would be way underinvested during the day. That’s a point that doesn’t come out in the numbers if you just compare a target close with an implementation shortfall measure,” says Craig Blackbourn, EMEA head of transition management, Northern Trust. A transition manager selling securities in Europe and buying them in the US must consider which to keep back for the period in which both markets are open (typically 2.30pm to 4.30pm UK time). Trading heavily at the close could also leave a portfolio unbalanced. “If you only trade the liquid bit of a portfolio at the close, you may inject a load of the risk in your residual. It’s not an easy path to tread,” says Andy Gilbert, EMEA head of transition client strategy at BlackRock. This illustrates a fundamental asymmetry of risk for those using the close. To the index managers who drive the high end of day volumes there is no conundrum: they will always rebalance their flows; the resulting price is reflected in the fund’s closing price.

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TRADING THE CLOSE

A wider problem?

teve Webster, director of transitions and trading solutions at MJ Hudson says it is useful to distinguish the two sources of risk that will affect the cost of a transition. “The first, on which implementation shortfall is largely focussed, is the market impact of the trading related to a transition. This can be thought of as the forces put in motion by the trading that widen the gap between the legacy sales and target purchases,” he says. The second is opportunity cost: distinct from the market impact of trading, which relates to forces moving the market outside the transition activity. Accurate reporting of these helps to guide expectation and set the trading approach recommended by managers. The apparent free cost of trading at or around the close (target MOC) is important as it can be sold as a transition solution which on paper makes Implementation Shortfall look expensive. When transitioning assets at a single point in time where the

Transition Management Guide 2022

benchmark and the execution are the same, transitions appear free of risk and implied cost, but clients should be wary of free lunches. Closing auctions are a complex array of supply and demand forces which provide invaluable liquidity, but also volatility and uncertainly. Transitioning to target MOC is not Implementation Shortfall for the simple reason that one considers cost and the other performance. The invisible cost impact on a transition by trading at the benchmark market close is particularly problematic given that implementation shortfall can still be misunderstood by some clients. Webster says that a popular error is to compare the cost of the legacy portfolio with that of the target portfolio at the end of the transition, a blunt measure which fails to account for the precise moment during the transition that legacy assets were sold and target assets bought.

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TRADING THE CLOSE

of implementation shortfall, but taken in combination they go a good way towards clarifying the picture. “While it’s difficult to match the level of transparency of implementation shortfall, which is an unbiased benchmark, advanced performance analytics and scenario analysis can provide more comfort to clients for choosing target close strategies and achieving an overall lower implementation cost,” says Vidal of Goldman Sachs. Crucially, measures must provide an accurate picture after the event. “Any close trading should be accompanied by comprehensive and transparent reporting, giving details on actual participation rates and price moves, also comparing vs historical averages over a configurable timeframe,” says McGee. “With trading volumes migrating dramatically towards the closing auction, the traditional approaches to evaluate transaction costs need to be revisited to include a specific measurement of on-close impact,” says Vidal. Clients need to be made aware of the likely impact ahead of time. Transition managers must provide all necessary information to inform a choice, since often trading the close will not be appropriate. “Certain trades lend themselves to a close trade strategy – such as when looking to simultaneously purchase against a pooled fund redemption priced at the close. Other transitions may be heavily skewed to illiquid names, where a close strategy could add little to no value once you cap your participation based on average closing auction volume,” says McGee. Where trading the close does occur, the strategy must be clearly signalled to the client. “It should be made very clear to clients what proportion of trading is proposed for the close, how this value has been determined,

If you put too much into the close, you would see some reversion the next day. Craig Blackbourn, EMEA head of transition management, Northern Trust.

But transition participants in the end of day auctions may become hostages to fortune. “Closing auctions typically restrict certainty of price and/ or completion. A balanced transition may come unstuck if your sell orders are not filled, resulting in buying everything and selling nothing, effectively leveraging your client. Then you are left holding your hat in your hand,” says Webster. In general, this is a resource that must be used with caution: poor end of day trading will leave the client at a disadvantage. “If you put too much into the close, you would see some reversion the next day. So, there are risks in there: it’s not a risk-free trade,” says Craig Blackbourn, EMEA head of transition management, Northern Trust. Compensating measures However, on balance, the benefits of providing some allowance for trading the close appear to outweigh the costs. And, while fogging up the measurement process under implementation shortfall seems a fair price to pay for a better outcome, transition managers should bring to bear other measuring tools to shine a light through the fog. Measures include headline volumes, timing, participation and weighted average price. Which shed most light on the transition varies with its liquidity profile, the type of strategy and how urgent it was to execute. Individually these may lack the precision and simplicity

Transition Management Guide 2022

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TRADING THE CLOSE

Execution algorithms and transaction cost analysis

he tools employed to evaluate the impact of trading the close are among a wider technological arsenal with which transition managers seek to distinguish themselves. Pre-trade, the clearer the picture the transition managers and client have regarding the volume of the stocks, the better placed they are to select the right date and time to start trading. It also makes for better communication about where the costs are likely to come from and how they can be minimised – comparing the contribution from technology stocks as against banking stocks, for example. James Woodward, head of portfolio solutions, Asia Pacific at State Street in Sydney says a new battle front is chat rooms and Reddit threads: through one of the company’s alternative data partners, clients are able to scrape thousands of digital media sources to measure the sentiment and intensity of media coverage associated with various assets. Post-trade, the suite of solutions provided

Transition Management Guide 2022

under the broad heading of transaction cost analysis has become an essential resource for clients, too. “Tools should allow clients to look into every facet of the transition, drilling down to see exactly how much one stock was responsible for performance,” says Woodward. Monitoring prices minutes then seconds ahead of the close, and comparing those with the next day’s opening prices, give a precise picture of the likely impact. Parent and child orders within individual stocks can be compared against various metrics. “This type of deep dive helps us explain exactly what we did and what the impact was. The measures are allowing clients to investigate what was traded, where slippage occurred and why, how performance compared with benchmarks, what contribution different algorithms made to the outcome, including what signals to the market they generate while the trades occurred,” says Woodward.

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TRADING THE CLOSE

and how this compares with the average closing volumes in each security (stock specific analysis is very important),” says McGee. “A good transition manager can predict the size of the exposure gap, explain if anything can be done to mitigate this and what this impact will be until the following day. This way, the contribution to the transition cost can be quantified, attributed or removed from the managers performance where cost that can’t be avoided,” says Webster. “As a transition manager, you should find out what you could and should do at the benchmark point and explain what impact you’ll have at the close,” says Graham Dixon of Inalytics. “In every case our role is expert and educator, providing the information for the client to decide what is best for them and their unique needs,” says Amanda Williams, regional practice lead for the Americas at Northern Trust in Chicago. Managers should also consult clients for favoured solutions to handle delays, as when they must sell from one fund and buy into another which prices at a different

time. “Do you sit out the market half a day or buy something to provide short-term market exposure, adding complexity for the transition?” says Graham Dixon of Inalytics. For multi-region transitions a hybrid benchmark – combining the close in the US with an implementation shortfall in Asia, for example – can be useful. Limits Prevention being better than cure, one route favoured by consultants to constrain the market impact of trading the close is to limit how much of it can be done, using volume limits. “[Consultants are] are coming round to the idea of allowing transition managers to trade at the close as long as the proportion of total volume is low. We recognise that the closing auctions are a valuable source of liquidity, but the practical way to use them is via a volume limit. And the key is transparency, where the costs of interaction with the close are made clear and not just assumed as a zero expense,” says Webster. Limits should be agreed between transition manager and client in advance, based on

We recognise that the closing auctions are a valuable source of liquidity, but the practical way to use them is via a volume limit. Steve Webster, director of transitions and trading solutions, MJ Hudson

Transition Management Guide 2022

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TRADING THE CLOSE

detailed analysis of historical volumes in those stocks during the closing auctions and the varying volatility of such auctions. They will vary with the size and dynamics of that market – what fits for Japan may not work in the US. “In most markets you can be approximately 10% of the closing volume. Between 0% and 10% you’re definitely not having an impact. Above 15% or 20% you are likely to influence,” says James Woodward, head of portfolio solutions, Asia Pacific at State Street. Webster is more cautious: “we’d be hesitant to sanction anything beyond 2% of ADV”. For their part, be comfortable that what they lose in transparency is outweighed by a better execution. “It’s up to those who advise the

As a transition manager, you should find out what you could and should do at the benchmark point and explain what impact you’ll have at the close. Graham Dixon, Inalytics

client to be comfortable the strategy is using liquidity as much as possible while also being as transparent as possible,” says Webster. In other words, the client needs the fullest transparency and expert advice to find the right balance.

Waverton Investment Management, equity fund merger

ompleting in November, Waverton Investment Management successfully implemented a global equity transition in two funds ahead of a merger. The transition consisted of collective funds, equities and FX which needed to be reconciled, traded and settled inside the one-week ‘black-out’ period. In advance of the event, Goldman Sachs’ transition team worked collaboratively with Waverton, which handled the event internally, providing assistance and expertise to deliver the most effective implementation route to minimise turnover across the two funds. It helped explore different trading strategies, as well as event-specific and operational aspects. The transition was implemented with the help of Goldman’s proprietary Algorithmic Portfolio Execution (APEX) suite to establish the optimal trading schedule and mitigate market risk. APEX enabled a detailed

Transition Management Guide 2022

execution schedule, which was valuable for projecting the end-of-day portfolio composition in the context of a multi-day trade and ensuring that each fund could continue to satisfy their concentration limits during the transition period. It was successfully implemented, minimising implementation shortfall, whilst respecting beta neutrality and cash management constraints across regions. Realised transaction costs were in-line with the pretrade cost estimates for each fund, and were communicated ahead of time to the stakeholders. “It has been a real team effort and being able to work with the Goldman Sachs transition management team and leverage their experience in this type of transaction has been invaluable”, said Louissa Oakes, head of trading at Waverton Investment Management.

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POOLING

Pooling - staying a step ahead The growing trend towards pooling in the UK and Australia poses specific challenges for transition managers while offering significant opportunities for them to add value.

he benefits of pooling are becoming more accepted by UK asset owners, following the longer-established practices of pooling among pension funds in countries like France and Germany. Recent growth in the sector has taken the proportion of pooled assets nearly level with that managed in segregated accounts: this year it stood at 45% of the total, according to the UK Investment Association. For LGPS schemes in the UK, progress towards pooling varies from scheme to scheme. Some, such as the Northern LGPS, a partnership between the Greater Manchester (GMPF), Merseyside (MPF) and West Yorkshire (WYPF) funds, are already heavily aligned. Others are earlier in the process, with a large portion of portfolios still unpooled. The core appeal of pooling comes from the unequal fee treatment afforded to segregated and pooled accounts. Consolidation among fund managers and the growth of passive fund investing has helped drive fund fees down, without putting an equivalent downward

Transition Management Guide 2022

pressure on segregated accounts. “Over the years, asset managers have slowly reduced the fees in their funds but haven’t done the same with the segregated portfolios,” says David Edgar of Inalytics. This is a problem given asset owners’ increasing focus on costs. “Cost cutting is the biggest driver today. Asset owners want to manage funds as efficiently as possible. The days of proliferation of segregated portfolios are over; consolidation will continue,” says Graham Dixon of Inalytics. The result is a steady migration from segregated accounts to pooled funds by major asset owners. “You are seeing platforms and asset managers merging similar products – for example Luxembourg and Irish funds that are tracking the same benchmark. Managers just can’t afford to keep two products [that are similar]: it means double the annual legal, trustees and custodial fees. Why wouldn’t I collapse them into one and halve my costs?” says Craig Blackbourn, Craig Blackbourn,

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POOLING

EMEA head of transition management, Northern Trust. Pooling suits managers, too. “A manager may have 70 segregated funds measured against the MSCI; retail, insurance and pension money all measured against the same benchmark. If they can put them into a single fund they can make the same offering to any investor, whether the amount is £5m or £500m, meaning their offering is more consistent. And it is more efficient too, resources like compliance can be pooled across fewer funds,” says Dixon. In Australia the growth of mergers between superannuation funds has spearheaded pooling efforts there (see box Box out – Pooling and Australian super fund mergers). The total numbers of super funds in Australia have halved since 2010 from 389 to 179 since 2010, according to Rainmaker Information, a research provider. Consolidation has been most pronounced among smaller funds: the number with less than $1 billion under management have dropped from 176 to 52. But further mergers will follow. According to KPMG, more than three-quarters of the sector’s AUM will be managed by the largest 12 funds, all of which will be larger than $50 billion, once the mergers that have been announced are complete.

Asset managers have slowly reduced the fees in their funds but haven’t done the same with the segregated portfolios. David Edgar, Inalytics

algorithms that have features specifically designed for the transition manager,” says Cyril Vidal, head of portfolio transition solutions at Goldman Sachs. “Invariably, a series of restructures take place that require major shifts in asset allocation,” says James Woodward, head of portfolio solutions, Asia Pacific at State Street. He estimates that his team currently works on one or two transitions per year supporting Australian super fund mergers, making up perhaps a tenth of his team’s total workload. Wherever pooling takes place, participants are becoming more familiar with the costbenefit trade-off of outsourcing transitions.

A role for transition managers As super funds continue to merge, transition managers are increasingly required to interact with pool products to assist them restructure their manager and asset allocations. “Pooling usually implies larger portfolios, held in segregated accounts and often managed in-house. These clients face challenges well known to transition managers and can benefit from our experience when transitioning mandates in-house. They are also large users of our pre-trade tools and portfolio execution

Transition Management Guide 2022

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POOLING

This is shifting the balance of clients demanding services from transition managers, says Blackbourn. “Look back 15 years and [most clients] were pension funds, SWFs, central banks and government agencies. Now [a bigger share] is professional investors – asset managers and money managers – seeking to help preserve performance and asset value,” he says. “Fifteen years ago, an asset manager would have its own trading desk and risk tools. Today even the largest are going to transition managers. [They are chasing] every basis point, with operations effectively and

efficiently managed sending savings back to bottom line.” As asset owners widen the range of assets that they own and, via pooling, collectively own a larger pot, the most efficient structure through which to own them may change. Here clients may have to consider factors other than cost. Typically, pooled assets limit the ability of an asset owner to vote at AGMs or on exceptional votes, for example. As this becomes an increasingly important route through which they are choosing to exercise their ESG responsibilities, it is taking on increasing weight in decisions.

Pooling and Australian superannuation fund mergers

n Australia, large-scale pooling is occurring a result of superannuation fund mergers, with many features familiar to European asset owners. Preparation for such moves may take up to six months and typically requires a huge amount of planning. The demands in terms of project management are significant: the transition manager must understand all the nuances of the portfolio and the needs and constraints of every stakeholder. Stakeholders including not only the client, including all those staff members required to provide authorisation for a transition, but also custodians, investment managers, administrators, those responsible for unit registry and consultants. “The plan will require precise scheduling of when assets can be redeemed. And it must take in wide variety of stakeholder considerations, including fund and trust notice periods,” says Woodward. “You need to build a picture of the different asset classes, managers, funds and custodians involved and start from

Transition Management Guide 2022

there. Every stakeholder has its own processes and procedures; you need a solution that works for everyone.” Individual structures provide specific challenges, such as which assets can be taken in specie from a trust, effectively negotiating a change of beneficial ownership, to avoid the spread entailed by going through cash. For securities bought or sold in the UK or Hong Kong there is the question of stamp duty. In this case, funds may be eligible for exemptions because a merger will be judged as not having entailed a change in beneficial owners. As with every transition, maintaining market exposure is key: scheme members who have been sold the cost reduction benefits of merging their super fund will not look favourably on a merger process which results in several percentage points of missed investment gains. As a result, the process commands widespread attention within plan sponsors. “The board, the CIO – all the staff are focussed on the merger and it has the attention of the

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POOLING

For emerging market portfolios, limits on transferring beneficial ownership add obstacles to pooling. And it may take time to understand the legal and regulatory considerations of owning assets directly.

schemes are well ahead of those for corporate pension schemes, alternatives portfolios represent a disproportionate share of what is left over. In part, this is because they are very hard assets to move, thanks to long lock-up periods required by managers of infrastructure, private equity and private debt funds. That means few or no opportunities to withdraw cash ahead of maturation dates or transact via the secondary market. In addition, pooled options may not be to local authorities’ liking. These are typically complex, high conviction mandates which authorities may have held for many years. They may not be

Alternatives’ growing role In the UK, for most local authorities much of the straightforward traditional strategies - the easy ‘lift and shift’ of traditional investment mandates – have been pooled. In many cases, much of the remaining rump comprises alternatives, such as multi-asset credit and private market portfolios. As a result, even as pooling rates among LGPS

whole fund,” says Woodward. Since Australia’s super fund merger process is broadly further advanced than the pooling of local government pensions in the UK, it has seen some funds internalise many of the tools offered by transition managers. “They are becoming asset manager-type entities, developing discretionary investment management, trading capability in house,” says Samsonov of Citi. In Citi’s case, given its brokerage expertise this means transition manager business can offer more of an execution style relationship, rather than complete end-to-end transition service. “These clients require specific parts of our service, such as access to the market and execution advice and reporting,” he says. Samsonov says his desk is offering more of a broker-style support, rather than a complete end-to-end transition service. “Clients are requiring specific pieces out of us, such as execution and access to the market. It’s not the full project management service but

Transition Management Guide 2022

perhaps advice on execution strategy, or actual execution when it comes to trading,” he says. Because the merger process is more piecemeal in Australia, clients generally have more flexibility and a wider set of choices about how and when to combine. “There is a range of approaches and an extended timescale – funds may operate side by side for some time; others may choose a full merger from one day to the next. But in the end, all these institutions are trying to save costs, and to do that they must rationalise their investments and this means transitions,” says Vidal.

There has never been a more difficult challenge: the longer period of opportunity cost clients faces when rotating into alternative is huge. Steve Webster, director of transitions and trading solutions, MJ Hudson

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POOLING

convinced there is a feasible pooled option, or fear the operational logistics of transferring them. Transferring this rump of local authority assets into pooled vehicles will mean a number of complex transitions in the coming years. “In part, where mandates are driven by specific styles or factors it is harder to create these in a pooled environment, so they tend to come later. This means that as we go forward transitions will continue and get more difficult,” says Steve Webster, direct of transitions and trading solutions at MJ Hudson.

Clients should look to transition managers for a clear funding schedule specifying which funds should be liquidated when to meet cash calls, considering how unbalanced that might leave the residual allocation. Given the nature of pooling, cash infusions may need to be collected from a large number of partner funds at the same time. “There has never been a more difficult challenge: the longer period of opportunity cost clients faces when rotating into alternative is huge,” says Webster.

How long will it last?

hile the core argument for pooling is cutting costs, exactly how much is saved by this route is open to question. Clients look hard at the management fee – for example, 0.7% in the pooled fund and 1.2% in the segregated fund. However, redemptions and subscriptions have an impact on other shareholders in a pooled fund strategy and so typically carry a higher cost than building segregated mandates. In pooled fund strategies investors also have less control over their unique investment requirements. “How many clients delve into the prospectus to compare subscription and redemption levies. These can be 3% or 5% in some cases. Exactly what the saving is for moving from a segregated strategy to a pooled strategy is not always clear as total costs are frequently not fully transparent or easily comparable for investors,” says Artour Samsonov, head of transition management and investment solutions at Citi in London. Specific asset classes carry other problems. In emerging market mandates moves in and out of pooled funds are harder to manage from market risk perspective due to limitations

Transition Management Guide 2022

on in-specie transfers. While developed market mandates in-specie transfers trigger stamp duty and financial transaction tax as a result of the change in beneficial ownership. In the case of changing the manager of a segregated account the beneficial owner doesn’t change. Whether these costs negate the benefits of the move depends in part on how long an asset owners plan to stay in the structure. “The more frequently investors change managers, the less rationale there is to go with a pooled fund allocation as costs are typically higher to go in and out. This trade-off also means that pooled fund allocations are more appropriate for passive investment mandates, rather than active investment mandates,” says Samsonov. He suggests that the acceleration of pooling in recent years, part of the heightened scrutiny on cost, may be a trend that plays itself out when asset owners better grasp the full associated costs. “I wouldn’t be surprised if, in five or ten years, some clients say this isn’t working for me and move back into segregated mandates, especially as investment manager and custody fees continue to compress.”

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SEAMLESS TRANSITION MANAGEMENT Maximise the performance of assets in transition by reducing unnecessary cost and risk. A well-planned transition strategy and the right resources can help you to: • Minimise unnecessary costs • Mitigate unrewarded risk • Reduce administrative workload • Eliminate performance holidays and maintain accountability For more information call Chris Adolph on +44 (0)20 70246335 Visit russellinvestments.com

For professional investors only Issued by Russell Investments Implementation Services Limited. Company No. 3049880. Registered in England and Wales with registered office at: Rex House, 10 Regent Street, London SW1Y 4PE. Telephone 020 7024 6000. Authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London E20 1JN. ©1995-2022 Russell Investments Group, LLC. All rights reserved. MCI-02756/30-12-22 EMEA-2281

INDUSTRY INDUSTRY ROUNDTABLE

Back to the road ahead

Global Investor assembled the industry’s leading transition managers and consultants to a room in the City. The discussion of the year that was ranged from the pitfalls of virtual due diligence to the merits and limits of attributing implementation shortfall to individual algos and execution venues.

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HUGO COX: As more due diligence is conducted virtually what is lost and what is gained? DAVID EDGAR: There’s no doubt transition managers have made great strides in showing their systems, meeting people and working through processes as best they can in a virtual world. But there’s also a pent-up demand for clients to get back into the transition manager’s office. I’m of the view that there’s nothing like seeing the animals in their natural environment, to use a wildlife analogy. You want to see where they’re sitting relative to other teams, how close to the trading desks

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I foresee that the minute restrictions are removed there will be a stampede of clients’ feet to get on-site again. David Edgar, Inalytics

they are and what internal communications look like. There’s also an opportunity to sit down with the compliance team and have a look at procedures and process documentation and so forth, which might be harder to do virtually. So, while everyone is getting through this as best they can and we are able to help clients’ decision-making, clients do miss a lot by not having on-site visits. I foresee that the minute restrictions are removed there will be a stampede of clients’ feet to get on-site again.

PARTICIPANTS: Hugo Cox, Global Investor, Chair. David Edgar, Inalytics. Dan Constantine, head of portfolio solutions strategy, State Street. Andy Gilbert, EMEA head of transition client strategy, BlackRock. Paul McGee, head of portfolio solutions, EMEA, Macquarie Capital.

DAN CONSTANTINE: We’ve been conducting due diligence exclusively virtually and we haven’t seen clients or consultants foregoing due diligence at all. Perhaps consultants have been a bit more flexible; we have seen a heavier reliance on RFPs, for example. To improve the virtual experience, we try to replicate what it would be like in-person: so, sharing content onscreen, being able to demo the systems virtually, and so on. Some of the best interactions are when our clients can sit down with portfolio managers, transition analysts, our trading desk – and compliance team – and see the systems live. So, we look to try to best replicate that inperson experience virtually.

Transition Management Guide 2022

Andrew Orr, portfolio transition manager, Citi. Craig Blackbourn, EMEA head of transition management, Northern Trust. Steve Webster, director of transitions and trading solutions, MJ Hudson. Chris Adolph, director of implementation services, EMEA, Russell Investments. Cyril Vidal, head of portfolio transition solutions, Goldman Sachs.

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RFPs shouldn’t replace due diligence sessions; you get so much from meeting the people, whether virtually or physically. Andy Gilbert, EMEA head of transition client strategy, BlackRock

ANDY GILBERT: If we can get a hybrid between virtual and actual that works for a client that’s great. You can bring in people from different locations virtually who can all contribute fully: everyone’s on a level playing field and that’s an advantage. RFPs shouldn’t replace due diligence sessions; you get so much from meeting the people, whether virtually or physically. And the due diligence session should corroborate what is written in the RFP. For example, if you have six team members or 20 traders, the client should meet them, see what they do and find out what technology they use.

But there is no substitute for face-toface meetings – for the client it means really getting under the hood of the firm, understanding where you sit, what’s your proximity to your traders, your support groups, and so on. So, we welcome that, as and when we can return to it. But until then, we shouldn’t underestimate the power of technology, which has allowed us to confidentially share firm policies or demo systems. And bear in mind the additional travel time required for in-person visits, all that is reduced with virtual sessions. ANDREW ORR: Off-site team members have really benefited from this Zoom revolution. Prior to this, you would have a videocall to bring in off-site team members or partners. Now they are on equal footing, which brings a completely new dynamic and positive contribution. We have team members who sit in New York, Sydney or Singapore, who can join calls just as easily and frequently as the London team members. With regards to the question of due diligence, we are seeing more requests for due diligence information, a combination of question specific and the business overview, zoom and the, working

PAUL MCGEE: I think client due diligence sessions and RFPs are more comprehensive and robust than ever, despite many sessions having to be conducted virtually. Clients are delving a lot deeper and we’re seeing a trend towards specialist due diligence sessions. Rather than clear out a whole day in your diary for a session with the entire operation, clients may now have separate sessions on business continuity, information security, compliance, risk etc. By conducting these remotely, we can cover different areas in real depth.

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from home approach has meant clients while still having the due diligence requirements are seeking in answers in a different manner. Not only is this a positive for the client, but also us, as we can bring in experts regardless of their physical location via zoom, for example, a European client looking to do an Asia small cap equity transition we can invite, trading, strategists and transition management members from the region. I sense that clients are ambivalent about on-site visits. While some aspects of the face-to-face meeting will continue to have benefits. For individuals the ability to easily conduct a due diligence session from their home is very appealing. I am also sure that corporates will see the cost/benefit analysis of this approach going forward. However, during this pandemic, we have seen clients in person for due diligence meetings who we would not have expected to. However, I believe this is as much about the ongoing corporate plans, which means due diligence will continue regardless. To later subject matter, the accessibility provided by virtual due diligence have accelerated ESG focus, particularly on disclosure on environmental issues, sustainability, personnel and so on.

ethos of external partners are duly aligned with those of our own organisation. At this time, ESG is very subjective, in that how one screening platform scores a company based on their models, can differ markedly versus the scoring of another screening platform. ANDREW ORR: There needs to be a clear distinction between regulatory and client reporting here. For regulatory reporting clients want to be able to hand over that responsibility and have confidence that it is being delivered as per all the regulatory requirements. Client reports is more complex, and includes a broad range of criteria, not only the content of the reporting, but also such things as, timing, format, analysis, security. On the issue of content, the first priority for CitiTM is to understand the client needs and then make sure that the reporting meets those, the content of these reports must also is easily accessible an transparent, sometimes this involves pre-transition calls to address question on the reporting. As a side note, responsibility for the reporting continues to reside with the TM managers, even where the origin of the reporting might be a third party provider, such as an electronic execution venue or market data

HUGO COX: How are transition managers handling increased ESG reporting requirements, including interim management needs?

At this time, ESG is very subjective, in that how one screening platform scores a company based on their models, can differ markedly versus the scoring of another screening platform.

CRAIG BLACKBOURN: At this time, ESG is affecting every part of the investment process and is not focused solely on the make-up of an investment portfolio. ESG is way more than simply an investment discipline. Clients want to know about employee equality, DE&I, vendor screening, real estate efficiency, technology standards and ensuring the

Transition Management Guide 2022

Craig Blackbourn, head of transition management international, Northern Trust

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For individuals the ability to easily conduct a due diligence session from their home is very appealing. I am also sure that corporates will see the cost/ benefit analysis of this approach going forward. Andrew Orr, portfolio transition manager, Citi

provider. Again, we will make sure that the data meets with the client’s needs and is transparent.

on portfolios. Then, certainly, ESG-related or ESG-focused ETFs and futures are becoming more popular, so we have the ability to use those as well if they happen to meet the client’s objectives.

PAUL MCGEE: When it comes to interim management and adhering to ESG guidelines, it’s important to remember we are typically short-term carers of a portfolio and asked temporarily to manage the client’s assets against a given index or a given tracking error. As transition managers we have limited discretion and we’re not the stock pickers. Even in an interim capacity we are to be guided by the client over what index to follow and what stock exclusions we should incorporate. We’re generally not the creators of the mandate and the mandate guidelines, although we can offer an ability to screen for adherence to these.

DAVID EDGAR: Clients these days are looking to transition managers to apply regulatory rules onto portfolios, particularly within the UCITS or AIFMD environment, so you can see that concept extending quite easily into any other regulatory environments. ANDREW ORR: With interim management agreements, we at Citi think it is essential to have two things in place before these mandates are on-boarded. Firstly, a very clear understanding what it is the client is seeking from the interim management solution. No longer are we seeing clients who are looking to simply park cash or assets until some later date. So, we are looking at; risk, reporting and duration. Secondly, and what is essential, is a clear interim management agreement which outlines the expectation of both parties from this period of management. This involves many discussions both to understand what the client needs are, but also internally a

DAN CONSTANTINE: Our transition management business currently operates outside the EU, so regulatory topics pop up less frequently than they do for some transition providers at this table. On exposure solutions and interim management, we look to subscribe to ESG benchmark indices, manage against those and apply security level screens

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collaborative discussion between the senior transition manager representative and our own legal team to ensure the contract is, transparent, comprehensive and fit for purpose.

means from a liquidity perspective. Volatility is not particularly high now from a historical perspective, although it does change very quickly. Even if it increases, if liquidity is very high then that may be less of a concern than if liquidity is low, in which case I’m facing that volatility for longer. If that’s also causing significant tracking error, whether compared to a target portfolio – against which I’m being measured for implementation shortfall – or a particular fixed income benchmark, then you may have quite wide-ranging outcomes. It becomes harder to predict. One of the main issues is a change in volatility or liquidity while you’re in flight in a transition. Typically, prior to commencing the trading you will provide your analysis, set expectations around costs, how long it’s going to take to complete and so on. Then, there may be surprises within your trading period for which you may not have accounted – that’s something we need to always keep a watch for. It means updating clients regularly about what’s happening – not just within their transition but within the broader market.

STEVE WEBSTER: Transition managers deal routinely with momentum bias and these are pronounced for ESG transitions. As sustainable mandates become more frequently the target, that tide will constantly be against them because they are selling the stuff that’s not fashionable and buying the stuff that is. Also, I think that their forecasts of market impact will be out. I think the volumes are much more changeable in what we call ‘replacement names’, which typically occur in a lot of target portfolios. Exclusion portfolios tend to use quite small sets of data to determine what the impact will be; we tend to see the volume of these names being quite sporadic. I think there could be a problem being accurate regarding the costs in the ESG portfolios. HUGO COX: If real or feared interest rates rises increase market volatility, how will transitions be affected?

CHRIS ADOLPH: Talking to my traders yesterday they came up with the phrase ‘taper tantrum’. Their view was there’s so much leverage in the system at the moment, that if rates get higher volatility will suddenly shoot up. One thing that we have done, which Zoom has helped with, is to place traders

ANDY GILBERT: Asset owners, such as pension schemes, should also consider what interest rate changes do to liabilities. We also need to think about that and what that

When it comes to interim management and adhering to ESG guidelines, it’s important to remember we are typically short-term carers of a portfolio and asked temporarily to manage the client’s assets against a given index or a given tracking error. Paul McGee, head of portfolio solutions, EMEA, Macquarie Capital

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If I can’t tell a client why the result is further away from what was estimated, then I’m not doing my job. Steve Webster, director of transitions and trading solutions, MJ Hudson

DAVID EDGAR: I’m a big fan of having a set of ‘go-no-go’ criteria and this should include a market monitor. For bonds it might be a group of bond ETFs – looking at the current price versus 10-day average or versus 30day average. I completely agree around the Zoom and Teams calls and the wider range of team members on them: we’re getting much more access to team-members who are more removed from those you would normally meet in person. More often now we get the traders on the call: it doesn’t really matter where in the world they are. The key to good communication is setting the narrative early in the process so that you have this picture of the market environment being built up as you’re heading into the transition, and if you’re seeing signs of increased volatility, you can talk the client through what that means for their transition. Finally, most clients just want to get their transition done, but if liquidity dries up significantly then you have a problem and it might be better to hold back.

much closer to clients than ever before. Previously, the transition manager may have done the talking. Now we’re pulling traders into that conversation and that brings a lot of information. If it’s a volatile day, are we slowing down the pace of trading? Are we putting our trades into smaller baskets, getting a greater number of quotes and maybe changing which dealers you’re getting quotes from? The transition manager may be great at pulling resources together, but as an expert on what’s happening at the time, the traders provide a great insight. CYRIL VIDAL: A key difference since the GFC is the transparency you now have on clearing levels thanks to the continuous pricing provided by credit ETF. On the one hand we have increased volatility, on the other hand, we have a much better way of managing risk and providing pricing transparency. The ‘equitisation of the credit market’ is underway with 15% of the overall investment grade activity in credit ETFs in the US. This proportion goes up to 30% in the high yield space. That’s a fundamental change from 2008.

Transition Management Guide 2022

HUGO COX: How can clients evaluate the impact of which algos, venues or brokers are used in a transition?

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DAN CONSTANTINE: In order to route and execute in a manner that achieves the client’s objectives you must know the strengths and the weaknesses of the available equity strategies – be that liquidity seeking strategy or a strategy aimed at capturing spread or minimising market impact and so on. Our trading desk spends a lot of time speaking with algo providers and our brokers to understand exactly how their strategies work and to facilitate best execution there. And we’ve increasingly been using post-trade analytics and TCA across all asset classes: the feedback that TCA can provide is critical to guiding and directing the execution strategy.

ascertain the benefits of using our services. CYRIL VIDAL: Gaining a full picture of the venues we have access to achieve the best price is not a simple task. For example, Goldman Sachs in Europe is connected to 68 different liquidity streams. For transition clients, hearing about dark venues, MTFs, systematic internalisers and so on, can be confusing. While transition managers have a role to educate clients and clearly state all liquidity options ahead of an event and through pre- and post-trade transparency, consultants can play a role here and provide comfort that the liquidity mix used by the transition manager is aligned to their objectives.

CRAIG BLACKBOURN: The detailed reporting provided by the transition managers is a critical component of our services. Pre-Trade analytics identify key sources of risk and cost, and the implementation strategy defines how the transition manager will mitigate for those risks. Most importantly, the post trade brings everything back together for the client, how has the transition manager performed relative to their cost estimates, with a detailed explanation for any deviation. The transition post-trade reporting should comprise sufficient TCA analysis to inform the client of venues utilised, volumes routed to those venues, spread capture, crossing levels etc. This level of information can help clients

STEVE WEBSTER: I think that venue analysis should be routine for all transitions, and we expect it from all the post-trades we look at. I want to know where trades have taken place, how successful that decision-making has been, and why that choice has been made as well. I expect any transition manager that is using third party or their own algos to have continually tested the success of using them. There are some algos that are very successful in terms of achieving a good quality outcome in terms of shortfall and some that are not. CHRIS ADOLPH: On the point of being very transparent about venues or dealers it’s a

We’ve increasingly been using post-trade analytics and TCA across all asset classes: the feedback that TCA can provide is critical to guiding and directing the execution strategy. Dan Constantine, head of portfolio solutions strategy, State Street

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Previously, the transition manager may have done the talking. Now we’re pulling traders into that conversation and that brings a lot of information. Chris Adolph, Chris Adolph, director of implementation services, EMEA, Russell Investments

function of managing expectations. If you’ve gone into the transition saying you will maximise the number of different venues then it’s incumbent on you to demonstrate that you have. Now, when we’re talking about algos, we’re principally talking about equity markets. When you’re talking about fixed income it’s about how you select your dealers: how you approach that is different for every transition manager. Remember that the price a dealer offers one day for an instrument may be very different a week later. Our analysis shows that no dealer has the best price more than 6% of the time, so you need a wide range and a way to evaluate them. Do you have a process where you’re taking in that historical information and assessing who the right dealers are at that particular point in time? That’s a very different skillset on the fixed income side from the equity side. It includes demonstrating in post-trade analysis what dealers you’ve gone out to, how many bids you got and how you chose between them.

access to statistical information on algos or venues. Instead, clients look to the transition provider as the market expert to guide them on the most appropriate strategy. We continue to see clients who want to understand the strategy and the logic of the strategy depending on asset class and market conditions. STEVE WEBSTER: If I can’t tell a client why the result is further away from what was estimated, then I’m not doing my job. The difference will only be clear if I can interrogate the strategy that was used and how effectively it was executed. If there is sizeable slippage from what was estimated then either it was subject to some sort of market event, or something else happened. I’m looking to see how the transition manager adapted that strategy to suit the circumstances, and I can only do that by looking at how they used the different sources of liquidity – which algos were used at what time and how the strategy changed. CHRIS ADOLPH: Have there been many times where it’s come down to a venue selection or an algo choice that has actually

ANDREW ORR: I very seldom find the asset owners who we are mandated by have

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impacted the result that much? I find if there’s a big deviation it’s typically more of a macro than a micro issue…

risk and cost, before adopting implementation strategies and risk mitigation techniques to help manage the necessary market execution. The range of events where institutional and professional investors, including asset managers, engage the services of the community continue to expand in both size and complexity.

STEVE WEBSTER: The macro affects the micro: the way the transition manager deals with it is evident through the strategy and the way that strategy changes. When we get the source of the execution and see how that execution progresses over time, we can tell how that strategy changed over time, and we can see exactly where the value-add is coming from.

HUGO COX: Where do you see the most complex transitions coming from today and in the future, and what are you doing to mitigate the risks?

DAN CONSTANTINE: Our most complex events are plan mergers, plan conversions or sub-advisor changes. This means a number of funds involved, often in the double digits on the legacy and the target side. We certainly focus on the planning and project management aspects: coordination across multiple parties; record keepers, sometimes multiple custodians, and then multiple fund managers involved. We start planning many months ahead to consider all the operational issues that could come up, to ensure that implementation goes smoothly. In one of the events we managed in the last year, we used portfolio optimisation tools to evaluate tracking error and optimise the asset mapping between all the different legacy and target funds. Then, once you’ve got the mapping down it’s critical to evaluate whether to use a hedge and really optimise the composition of the hedge if you do. Also, we have seen asset manager clients using ancillary services. In addition to transition management and interim management, there is outsourced trading and currency management as well.

CRAIG BLACKBOURN: The use of transition managers continues to grow as investors seek to achieve cost and risk savings when making changes to their investment portfolios. The skills and experience of the community in helping asset owners identify key sources of

PAUL MCGEE: To mitigate the risks for complex transitions, we get more involved modelling different ways to approach both the transition period and the transition structure for the client. This is done in the lead up to determine when and where best

CYRIL VIDAL: I think you have to distinguish the algorithm that provides the optimal trading schedule, at the portfolio level, by optimizing the trade-off between execution risk and market impact, with the lower level liquidity seeking algos that decide where to route an order. Whether it’s done manually or by an optimiser, the transition manager must be able to provide transparency on the scheduling of executions, the rationale behind each decision to prioritise the unwind of a large idiosyncratic risk or conversely, holding back a stock that is a hedger and reduces the overall portfolio risk. Coming up with the right trade schedule is probably what will have the greatest impact on the overall implementation shortfall.

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In an environment where everybody is under pressure to reduce costs, being able to outsource certain functions to a transition manager is great, especially for complex transitions. Cyril Vidal, head of portfolio transition solutions, Goldman Sachs

a client should perform their transition. Is it in legacy account structures? Is it in target account structures? Is it in a ring-fenced vehicle? When we’re unwinding pooled funds, transferring assets or crossing between different legal entities within a fund structure; do these actions incur tax or not?

management challenges, liquidity challenges, or operational stakeholder management in a significant platform change. Your transition manager must be equipped with the tools and the experience to manage this complexity for our clients; and importantly to evolve and keep pace with these changing complexities.

ANDY GILBERT: Whole portfolio transitions are going to become more and more frequent. Rather than changing asset managers or slightly adjusting the strategic asset allocation across equity and fixed income, it is going to be more about “whole” portfolio change. With the rise of the outsourced CIO, mandates will need to be transitioned regardless of what’s in them; we’ll need to think about how assets are correlated, what kind of risk models you’re adopting to deal with the exposure challenge. Then rolling out or ramping up alternative exposures will have to be accommodated within the industry’s toolkit. As for complexity, we should consider unitised platform-based transitions. But the general point is that complexity comes in all shapes and sizes: complex trading strategies, complex exposure

CYRIL VIDAL: Regarding the trend towards asset managers using our services, there is greater need for automation – for a fully integrated infrastructure, including trading, analysis and execution. In an environment where everybody is under pressure to reduce costs, being able to outsource certain functions to a transition manager is great, especially for complex transitions. Recently, we have assisted an asset manager during a complex fund merger, where the client was facing various challenges to determine the optimal transition plan to minimise portfolio turnover and adhere to a strict timeline. Working in partnership with us helped the portfolio managers and their operation teams to answer these questions without too much distraction from their day-to-day activity.

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DIRECTORY

Goldman Sachs

Inalytics Transition Management Consultancy Services

Anthony Grocott Director of European Distribution 9th Floor, Corinthian House, 17 Lansdowne Road, Croydon, CR0 2BX Tel: +44 (0)20 3675 2908 Email: agrocott@inalytics.com

Cyril Vidal Head of Portfolio Transition Solutions – Executive Director Goldman Sachs International, Plumtree Court, 25 Shoe Lane, London, EC4A 4AU Tel: +44 (0) 20 7051 2163 Email: cyril.vidal@gs.com Group Email: eq-ln-tmg@gs.com

Inalytics ensures that your objectives are being met and your investments are protected during a transition. The need for independent scrutiny in the transitions industry has never been more acute. Inalytics scrutinises and verifies the actions of an appointed transition manager to ensure a satisfactory conclusion for our client. The three phases of our engagement are:

Goldman Sachs has been a provider of transition management services as a part of its broader pensions and insurance franchise for over 40 years. The firm established a dedicated transition management team in London in 2000 and has been an active provider of services ever since under a ‘broker model.’

Before: Independent, empirical scrutiny of potential transition managers’ proposals to help you understand their implementation strategy. We critically assess their previously completed transitions to reveal their level of skill.

Our Portfolio Transition Solutions Group consists of a team of specialists comprised of Transition Strategists, Portfolio Strategists, Execution Coordinators and Operations. Our approach that involves multiple specialists within GSI ensures that clients benefit from the best practice know-how and service Goldman Sachs has to offer along every single step of a transition trade.

During: Expert monitoring during the transitions event to ensure that any potential disruptions to completion are quickly identified and mitigated. After: Clear and objective reporting which verifies the implementation shortfall and provides a critical assessment of the transition manager’s performance.

Goldman Sachs’ transition team has access to a wide range of sources of liquidity, externally with access to multi-broker and internally through our trading desks and the support of our sales franchise. This unrivalled set-up gives us the ability to design and implement strategies that best fit our client’s risk and cost objectives. Our team has been at the forefront of product innovation, designing best-in-class risk management techniques to solve for transition needs or leveraging on Goldman Sachs infrastructure for providing pre- and post-trade analytics and increased transparency in executions.

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DIRECTORY

State Street Global Markets – Portfolio Solutions

Global Locations: Boston, London, Frankfurt, Singapore, Sydney, Tokyo

State Street Financial Center, One Lincoln Street, Boston, Massachusetts 02111 Dan Morgan Global Head of Portfolio Solutions Tel: +1 617 664 8879 Email: dmorgan@statestreet.com James Woodward Head of Portfolio Solutions International Tel: +61 282 491 248 Email: jrwoodward@statestreet.com Michael Putica Head of Distribution Tel: +1 949 932 1446 Email: mputica@statestreet.com Dan Constantine Global Head of Portfolio Solutions Strategy Tel: +1 617 664 4802 Email: dconstantine@statestreet.com

State Street Corporation (NYSE: STT) is one of the world’s leading providers of financial services to institutional investors including investment servicing, investment management and investment research and trading. With $43.3 trillion in assets under custody and/or administration as of September 30, 2021, State Street operates globally in more than 100 geographic markets and employs approximately 39,000 worldwide. State Street Global Markets (SSGM) delivers innovative, value-added solutions to meet clients’ financing, liquidity, and asset intelligence needs. The Portfolio Solutions group within SSGM supports investors by delivering multi-asset outsourced agency trading and risk management services through an experienced global workforce and resilient infrastructure. The group provides transition management, exposure and interim management, and outsourced trading solutions, each offering institutional investors opportunities for improved operational and cost efficiencies. State Street Alpha, our front-to-back investment servicing platform, enables clients to unlock liquidity, one security at a time, right on their desktops. Services: Transition Management, agency execution and brokerage, outsourced trading, currency management, exposure management.

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DIRECTORY

Macquarie

Northern Trust - Transition Management

Paul McGee Head of Portfolio Solutions, EMEA Macquarie Capital 28 Ropemaker Street, London EC2Y 9HD Tel: +44 203 037 5655 Email: Paul.McGee@macquarie.com

Craig Blackbourn Head of Transition Management, EMEA Email: cab18@ntrs.com northerntrust.com Chicago: 50 South LaSalle Street, Chicago, Illinois, 60603 London: 50 Bank Street, Canary Wharf, London, E14 5NT Sydney: 225 George Street, Suite 40/3, Level 40, Grosvenor Place, Sydney, NSW 2000

Mick Larkin Portfolio Solutions ANZ and APAC Tel: +61 2 8232 0639 Email: Mick.Larkin@macquarie.com

Northern Trust combines risk mitigation and robust project management with global trading expertise (with trading desks in Chicago, London and Sydney) to help clients navigate the process of change and implement large complex portfolio changes.

Kevin Byrne Portfolio Solutions Americas Tel: +1 212 231 2477 Email: Kevin.Byrne@macquarie.com In unpredictable markets, how you respond to change makes all the difference. Macquarie’s award-winning Portfolio Solutions team can help you navigate change with confidence, providing deep expertise in managing the risks and costs of asset allocation, transition management and portfolio restructure.

With 30+ years of transition management services, our approach is consultative and underpinned by four key fundamentals: • Customised trading strategies built around the client portfolio leverage our extensive capital markets solutions, including agent-only global execution in equity and fixed income, supported by best-of-breed technology and intellectual capital

We partner with our clients over the long-term to offer an end-to-end project management and execution service, from detailed planning and reconciliation of trading, through to comprehensive reporting and ongoing engagement. Clients are reassured by our commitment to transparency, receiving a tailored, comprehensive suite of reporting that ensures decisions are backed by real insights.

• Skilled, robust and fully auditable project management expertise supports the transition event • Expert risk and cost minimization techniques help mitigate potential exposure, execution, operational and process risks and associated expenses

Our experienced regional teams leverage the technology of our custom-built transition management platform PILOT, to offer clients innovative transition solutions. With bases in London, New York and Sydney, and a 24-hour global agency trading platform, our connectivity to markets and investors allows us to achieve optimal solutions in each asset class.

Transition Management Guide 2022

• Clear, comprehensive transparent reporting includes detailing both estimated costs and actual costs postevent. Leveraging the heritage, strength, technology and innovation of Northern Trust, we provide clients with solutions from across our capital markets business. These strategies for success are designed to enhance performance, increase liquidity, manage exposure, mitigate risk and reduce costs, while providing the governance and transparency our clients expect while trading in global markets.

www.globalinvestorgroup.com

DIRECTORY

MJ Hudson

Citi Transition Management (CitiTM)

Steve Webster Director | Transition & Trading Solutions MJ Hudson, 1 Frederick’s Place, London, EC2R 8AE Tel: +44 20 7079 1000 Email: steve.webster@mjhudson.com

Artour Samsonov Head of Transition Management EMEA, Citigroup Global Markets Limited Citigroup Centre, Canada Square, Canary Wharf, London, E14 5LB, United Kingdom Tel: +44 (0) 20 7986 0611 Email: globaltm@citi.com

MJ Hudson’s transition & trading solutions team provides fully independent transition management advisory services to corporate pension schemes, local government pension schemes, insurance companies, local government pension pools and a variety of large asset owners. These include:

William Cobbett Head of Transition Management Americas Tel: +1 212 723 4181

Planning & advisory We provide advice on the likely costs and risks in a transition event and the optimal route and structures required in changing investment exposures.

Michael Jackett-Simpson Head of Transition Management Asia Pacific Tel: +613 8643 9779

Transition manager selection We manage the selection of transition managers utilising our proprietary TM scorecard powered by our detailed survey of all providers, alongside transition manager performance data of past events. This allows for both a qualitative and quantitative approach to selection.

Citi is a leading global financial services company, has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. The company history dates back to the founding of the City Bank of New York (later Citibank) in 1812. Citi Transition Management (CitiTM) is a core businesses within Citi’s Global Markets franchise, operating as a fiduciary to deliver innovative portfolio solutions to institutional clients such as sovereign wealth funds, pension funds, insurance companies and asset managers. CitiTM also offers non-discretionary portfolio management services, which include FX and futures overlay management.

Oversight We provide experienced oversight and reporting on all aspects of the transition process in flight. Cost analysis and reporting Our transition performance analysis considers a full range of deliverables, costs and risks across a transition event in an independent post-trade review. Working alongside our investment consulting and pension trustees and advisory teams, and with over £80bn of assets under advisement and a high calibre team, all of whom have many years of experience in the investment industry at Investment Director or CIO/ CEO level, we are extremely well placed to provide pro-active, bespoke and truly independent advice on all investment matters and asset classes.

The business provides global coverage and risk management of client projects through its dedicated TM teams in London, New York and Sydney.

Additional services include manager selection, operational and investment due diligence, investment strategy advice, asset allocation and independent investment advice.

Transition Management Guide 2022

www.globalinvestorgroup.com

DIRECTORY

Russell Investments

BlackRock

Nick Hogwood Managing Director 12 Throgmorton Avenue, London, EC2N 2DL Tel: +44 20 7743 4966 Email: nick.hogwood@blackrock.com

Chris Adolph Director, Customised Portfolio Solutions, EMEA Russell Investments Implementation Services Ltd Tel +44 (0) 20 7024 6335 Email CAdolph@russellinvestments.com

Paul Francis Managing Director 55 East 52nd Street, New York, NY 10055 Tel: +1 212 810 3637 Email: paul.francis@blackrock.com

Carolyn Tsalos Director, UK Institutional, Russell Investments Tel: +44 (0) 20 7024 6085 Email: ctsalos@russellinvestments.com

Tahmimm Hassan Director 16/F Champion Tower, 3 Garden Road Central, Hong Kong Tel: +852 390 32407 Email: tahmimm.hassan@blackrock.com

Russell Investments is a global investment solutions partner, dedicated to improving people’s financial security. Russell Investments offers actively managed multi-asset portfolios and services that include advice, investments and implementation. Russell Investments has £244.8 billion in AUM and works with over 1,800 clients globally*, independent distribution partners and individual investors in 31 countries globally. As a consultant to some of the world’s largest pools of capital, Russell Investments has £2.1 trillion** in Assets Under Advice, Assets traded around £2 trillion***, £82 billion managed in overlay services globally and managed 197*** transition events representing £66 billion*** all through its Customised Portfolio Solutions.

BlackRock was one of the world’s first providers of dedicated transition management services since its inception in 1993. We have built a market leading transition service, carrying out hundreds of assignments every year, among which are some of the largest and most complex transitions in global financial markets. Our 60+ transition professionals are located in London, Budapest, San Francisco, Chicago, New York, Hong Kong, and Tokyo and service clients across all time zones. Our team is fully dedicated to the transition service and leverages the many benefits of the wider BlackRock platform.

Data at 30-09-21 unless otherwise stated. *Data at 31.12.19

As an asset manager, BlackRock’s business model is fully aligned with the objectives of our clients. BlackRock focuses on providing tailored transition solutions to meet our clients’ needs and requirements. Our clients directly benefit from the scale and size of BlackRock’s trading platform, the pricing power it achieves and the experience of our traders across all asset classes. Every transition is executed on BlackRock’s world leading portfolio and risk management platform, Aladdin, designed to handle the most complex transition.

**Data at 30.06.21 ***Data at 31.12.20

Transition Management Guide 2022

www.globalinvestorgroup.com

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