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Portfolio transition management is the Bubble Wrap of institutional investing: a sophisticated and effective solution for protecting fragile and cherished assets being moved from one place to another. It’s also inexpensive, with specialist providers undertaking complex transactions involving multiple asset classes and trading venues, but collecting little in revenue. The Establishment of four or five top providers has a firm grip on the business, but customers are seeking a different mix of products, which could tilting the established balance of provider power.
As a business proposition, transition management probably could not survive on its own merits but, to providers such as jumbo custody banks, asset managers, and broker/dealers with order flow and trading capacity to spare, while transition services may not plump up the bottom line, they do allow for a broader service offering to advisory and custody clients.
The most comprehensive taxonomy of the transition management ecosystem is probably the annual survey conducted by aiCIO’s sister publication, PLANSPONSOR, and published in each year’s May issue. The 2011 version profiled 14 firms, thought to comprise 90% of the global transition market, which handled nearly 8,000 transactions valued at more than $3.7 trillion in calendar 2010. Trillions notwithstanding, it’s a small industry, where everyone seems to know everyone else—the surveyed firms reported fewer than 500 employees in total for their global operations—and it’s getting smaller. “Net-net, the business has contracted since 2009, and that will continue over time,” observes Ben Jenkins, transition management strategist at Northern Trust in Chicago.
Bo Abesamis, Head of Trust and Custody Consulting at Callan Associates, sees the current environment as a watershed for transition managers: “I had four calls in the last three weeks that investment banks are exiting the business, and I think that’s because of the thin margins.” Joining the fray may be as challenging as staying in. “Consultants have refined the RFP process, and require everyone to have a five-year track record,” notes Rob Saffer, Global Head of Transition Management at J.P. Morgan. “Providers need to show that they are committed to the business, and have sustainability for the long term. With those hurdles, no one is going to come in and become an instant success.”
For this installment of the Establishment Series, we consider the top firms in transitions, who are likely to remain so, and those leaving the business; look at the portfolio shifts that are causing an evolution in the nature of transitions; and consider changes at a few firms that might shake up the old order.
Establishment
Custodian Banks and Investment Managers
Market watchers consistently name BlackRock, Russell Investments, and State Street as the top firms in the business (this ranking is confirmed by PLANSPONSOR as well). Each is large, has a global presence in many markets, and thus can source and place client investments in many asset classes. Importantly, all hold exclusively to a fiduciary capacity for transitions, where providers act as clients’ agents throughout, are not trading for their accounts, and fully disclose to clients all revenues they earn.
Establishment
Investment Banks
Historically, investment banks have been part of the business, bringing to bear their broad trading capacity. Lately, however, their participation has been more episodic; observers say their interest varies with the strategic aims and patience of a given management team, and where a firm finds itself in the cycle of profit and expansion. “There are entities that come and go—some refer to it as the ‘tourist element,’” remarks the head of transitions at a leading firm. Goldman Sachs left the transition business two years ago, and seems gone for good. Credit Suisse, Morgan Stanley, and Citigroup all shut or reduced their franchises as well in 2009, but have reconstituted their operations, to a degree sufficient to respectively rank fifth, fourth and eighth in completed transition value in PLANSPONSOR’s 2011 survey.
New Establishment
Transitions in Fixed Income
Historically, transitions have been dominated by equity transactions, and the value of fixed-income portfolio transitions reported in the PLANSPONSOR survey for 2010 was only 9% of the total. However, their importance likely will be growing, for two reasons. First is the move to liability-driven investing, or LDI, by corporate pension plans, which calls for larger allocations to long-duration bonds, particularly high-grade corporates. (It’s a U.S. phenomenon; UK and European plans have made the move.) In an environment of low interest rates, sponsors have reallocated to bonds only grudgingly, but LDI’s time will come. Second is an appreciation for the risk mitigation transition managers can bring to fixed-income portfolios. According to Rob Saffer of J.P. Morgan, “It used to be that the ‘bond price was the bond price,’ but the liquidity crisis showed investors that different dealers are willing to pay different prices on the same bond, depending on their risk appetites. We’re actually seeing fewer fixed-income opportunities than we did in 2008, but the crisis convinced clients that there is an application for transition management in fixed income.”
New Establishment
ConvergEx Group
ConvergEx has been a large player in transitions, and ranked sixth by value in 2010. Transitions Head Kal Bassily cites familiar avenues of growth, including DC plans and interest from customers in new geographies, such as Asia and the Middle East. What distinguishes ConvergEx, however, is a change in its ownership: In mid-July 2011, private equity firm CVC Capital Partners acquired a majority holding (terms were not announced, but press reports placed the investment at $1.9 billion for a two-thirds stake). “ConvergEx has many business lines, and we are only a small part,” notes Bassily, “but we see the investment as a vote of confidence for the firm as a whole, and for our transition management team.” Said one observer: “With the growth in the business, and ConvergEx getting so much capital, it’s hard to believe that in 2008 people were predicting the death of transition management.”
New Establishment
Fidelity Capital Markets
The institutional brokerage arm of Fidelity Investments has provided transition management for years, and, in October 2010, Fidelity hired Kevin Byrne, formerly Head of Transitions for ConvergEx and J.P. Morgan, to run its transition franchise, a move some observers took as a signal that it might be about to raise its low profile in the business. (In the 2011 PLANSPONSOR survey, Fidelity ranked 11th out of 14 firms for transition value.) The Boston giant has not yet made a business development splash, but is thought to be carefully and deliberately reworking its positioning in the market. (Fidelity declined an invitation to comment for this story.) As a powerhouse in institutional brokerage, an industry leader in both defined benefit and defined contribution asset management, and blessed with the parent company’s enormous resources, Fidelity certainly could climb to a top spot in the business, particularly as a growing proportion of defined contribution plans seek out transition service—should management be so inclined.
New Establishment
Transitions in Defined Contribution Plan
Also capturing an increasing share of transition business are portfolio shifts in defined contribution plans. Some of the increase is simply due to the greater mass that is gathering, but sponsors also appreciate that the complexity of significant renovations may call for transition specialists. The presence of thousands of participant accounts can make these transitions more complex than DB shifts: “For a DC transaction that is mapping large amounts from one group of funds to another, without any blackout period, sponsors need a dedicated team working on a transaction for several months,” notes Ravi Goutam, Head of North American Transitions for BlackRock. DC transactions accounted for just a few percent of 2010’s activity, but providers believe they have only scratched the surface of the market.