How valuable are transition managers?

Specialist transition managers are regularly used by schemes to reduce the costs and associated risks of changing managers, asset allocation and conducting mergers.

The elimination of so-called ‘performance holidays’, where new investment managers fail to account for investment performance over the period of transition from an old manager, is also an attraction of contracted change management.

In 2014, the FCA found that schemes transferred over £165bn with the assistance of 13 transition managers as part of its Transition Management Review.

How essential are transition managers to prudent scheme administration, and what can schemes do to ensure transparency throughout the process of change?

Transition managers are suited to larger schemes

Scheme size invariably influences the viability of engaging a transition manager, and the necessity for pooling transition management mandates.

Andy Gilbert, managing director of transition management at BlackRock, said: “Most schemes engaged with the process of change have included a transition manager."

According to Gilbert, “some of the largest schemes” independently hire transition managers, while mid-tier schemes are likely to utilise pooled mandates.

“The economies of scale probably don’t play out for a smaller scheme,” Gilbert said.

The administrative burden associated with engaging a transition manager often represents a deterrent to schemes from using the practice.

Gilbert warned that “leaving it late” prior to a transition can impair a manager’s ability to complete its necessary pre-transition analysis, leading to an obfuscation of transition costs and performance monitoring.

Funds can make a success of a transition

Not all experts are familiar with the supposed near-ubiquity of transition management that Gilbert described.

Paul Black, client director at Capital Cranfield Trustees, agreed that the practice is favoured by larger schemes and “relatively complex transitions”, but did not support the view that it is widespread. He did, however, recognise the merits of transition management.

Black said: “I think having a specialist who is able to manage some market exposures to make sure that is not lost during transition [offers] the opportunity to trustees to make a success of a transition.”

According to Black, transition management provides greater value in the instance of transition across a wide range of asset classes and managers, making it particularly suitable for large schemes.

“Implementation shortfall is a standard measure of the cost to get that transparency, the cost of doing the transition. You really do need to make sure you’ve got the right… process and calculation of that cost,” he said.

State Street charged the six institutional investors with hidden mark-ups and failure to disclose material information to their clients, according to the SEC. Black said that transparency over transitional arrangements is vital to successful implementation.

A spokesperson from State Street said: "As a reminder, the FCA-mandated review recognised that [the] overcharging identified in the settlement is historical".

"We've significantly improved our client reporting to ensure clarity into how we are remunerated for our transition services, underlying our commitment to improving transparency in the industry."

Schemes must prioritise attention to detail

Schemes may also look to their investment consultants for change management. But questions remain over their competency in the area, compared to full-time transition managers.

Melanie Cusack, client director at independent trustees company PTL, said: “It’s quite an intense, time-sensitive project, and getting a specialist involved is vital.”

“In the small to medium landscape you’d probably rely on an investment consultant to use their transition specialist in-house,” she said.

“I don’t think a mainstream investment consultant has the same attention to detail that a transition manager does,” she added.

Trustees must also seize the initiative over detail, and prepare adequately in order to secure value from a transition specialist.

“It’s quite hard to make sure you know everything that’s coming your way, so you know what the charges are,” Cusack said.

“I think pre-planning is absolutely paramount in terms of communication with the managers beforehand… but to actually monitor it along the way, I think it is a bit of a minefield because of all the trust placed on the transition manager,” she added.

*This article has been revised since its original publication to clarify that the company that settled the complaints was State Street.