In an industry with its share of controversy, transition management clients are paying more attention—but not giving up.
Misdeeds (at Convergex and State Street). Exits (at Credit Suisse and JP Morgan). Shrinking margins and revenues (everywhere). Despite such headwinds, and against conventional wisdom, the transition management business is actually gaining trust and understanding, according to the 2013 aiCIO Transition Management Survey.
First (and perhaps foremost), the users of transition management services are gaining confidence in their own comprehension of this business. According to the survey—which was conducted from March through May and received 285 responses—these users have a greater understanding of transition management models (57% have a good or better understanding now, compared with 41% last year), and, somewhat surprisingly, half of asset owners now say they mostly or fully trust the transition management industry (versus 25% that said the same last year).
The number of portfolio transitions was also up over the past year. Perhaps the increased transition activity was due to market and manager inconsistency: Fully 60% of this year’s survey respondents cited the performance of investment managers as the primary reason for conducting their transitions. Last year, this reason was cited by less than half of asset owners. Change in the structure and/or investment personnel at the investment manager was also a top reason for conducting a transition (cited by 37% of respondents). Changes at the asset owner—an asset-allocation shift (41%), rebalancing of the portfolio (21%), and restructure of the fund (30%)—were also given as reasons for transitioning portfolios.
A few new questions were asked this year, and the results are an encouraging indication that asset owners conducting transitions are paying attention. First, we asked whether clients require a Transition Management Agreement (TMA) to be in place in order to govern the transition. Eighty-six percent of respondents said that a TMA is always required, and another 8% said it is sometimes required (makes you wonder about the remaining 6%).
Another new question this year, which was in large part prompted by the aforementioned revenue-disclosure scandals in this industry, asked asset owners whether they care if their transition manager derived “undisclosed benefits” from various sources as a result of the transition. Respondents overwhelmingly indicated that they do care. For example, 83% of asset owners say they care about revenue-sharing agreements with unaffiliated brokers or execution venues, 82% care about benefits derived from affiliated execution venues or trading desks, and an equal 82% care about net trading and disclosing revenue from a transition manager that sells the owner’s order flow. Benefits derived from internal order crossing are the least of the concerns, but still important to 64% of respondents.
A small group of respondents (7%) conducted portfolio transitions in 2012 without using a transition manager. When asked why a transition manager was not used, just over half of these said that the transition was either too small or too simple, while 27% said they performed the transition in-house, had insufficient time to select a transition manager, and/or allowed the target manager to perform the transition.
A much more drastic change to the survey this year came in the form of reviews of transition managers by their asset owner clients, who were asked 12 short but pointed questions about the nature of the arrangements they had with—and their evaluations of—their transition managers. The league tables that follow represent the responses of clients of eight transition managers that received at least the minimum 10 client responses. (Credit Suisse closed its US business and did not receive enough responses to qualify elsewhere. JP Morgan closed the majority of its business.) Two of the league tables also show “weighted” scores in addition to un-weighted ones: the table for Confidence in Revenue Disclosure and the table for Overall Service Rating. In terms of weighting factors used, we took into account the size of the client (as measured by total investable assets) as well as the number and size of transitions conducted with the particular transition manager to determine a weighted score.
The information in the 2013 Transition Management Survey represents data collected by aiCIO from 285 global asset owners, on the portfolio transitions they mandated and the managers they used in 2012. The survey closed for responses on May 16, 2013. Approximately 80% of the respondents represented funds with $1 billion or more, 30% were outside the US, and about three-quarters were traditional defined benefit pensions. A total of eight transition managers received sufficient client feedback to qualify for listing on the league tables. Unweighted scores represent the raw average score given to the transition manager by its clients, on a scale of 1=poor to 5=excellent. The weighted scores take into account two additional factors: size of client and size of transition(s) done with the manager. For information on additional research available, please contact Quinn Keeler (firstname.lastname@example.org).