Transition Management:Between Sides
The move toward LDI fuels the transition management industry
Illustration by Christopher Silas Neal
The transition management industry settled in last year to the changes wrought by the financial upheavals of previous years. “To some extent, the more things change, the more they stay the same,” says Steve Kirschner, director of Transition Management—Americas, at Seattle-based global asset manager Russell Investments. In the last year, the transition management industry saw a continuation of trends from previous years, such as incorporating more fixed income into asset allocations and facilitating greater transparency and disclosure.
The surge in business for transition managers that began in 2010 continued into 2011. Driving much of that business last year was the move toward liability-driven investment (LDI). As defined benefit (DB) plans move to de-risk, they are reallocating greater portions of their portfolios into fixed income, and sponsors are utilizing transition managers to get them there.
With the move to LDI, many plans are restructuring their assets, which is often the biggest transition that clients have undergone in their careers, says Kirschner. “We have seen and continue to see more defined benefit transactions shifting from the traditional 60/40 equities/fixed-income allocations to longer-duration fixed-income investments to match liabilities,” says Travis Bagley, director of fixed-income transitions at Russell Investments. In 2011, fixed-income transitions were 37% higher than in 2010, says Kirschner.
Scandal plagued the industry, after it was revealed that a State Street employee misled clients and internal compliance about fixed-income transaction fees. One client, the Royal Mail Pension Plan, was reimbursed; other funds that underwent transitions with the rogue employee reviewed their transactions and at least one other fund has been reimbursed, as well.
Additionally, in 2011, stories surrounding foreign exchange trading (FX) surfaced in the press. The focus was how fees for FX are charged and disclosed, says Marc Procek, senior vice president with Segal Rogerscasey. FX fees are not always recognizable or understood, he says.
FX, on its face, often seems to have cheap commissions on the securities transition side, but there are usually hidden spreads, explains Virgilio Abesamis III, executive vice president and manager of the Master Trust, Global Custody, at Callan Associates. “Transition managers are lowballing on the front end, but plan sponsors are paying on the back end,” he says.
Lawsuits were filed because of FX fees. A number of governmental plans, including Massachusetts Pension Reserve Investment Management, New York City’s pension plans, Washington state’s pension fund and others, have become involved in FX overcharging lawsuits, either directly or through their state’s attorney general.