Tue, 27/09/2005 - 07:17
Almost half of all asset transition managers are hired by US plan sponsors without a formal search or outside advice, according to new research.
The study by Greenwich Associates also found that In many cases, plan sponsors in need of transition management expertise simply fall back on firms with whom they have a previous relationship for custody or other services without exploring all available options.
"This largely informal process stands in stark contrast to the rigorous procedures typically used by plan sponsors in the selection of investment managers and for other critical decisions in plan management," says Greenwich Associates consultant John Colon. "Furthermore, many plan sponsors do not appear to be completely confident in their ability to quantify goals and measure effectiveness when it comes to the transition of assets."
Asset transitions occur when an institutional investor decides to change asset managers. In simplest terms, transition management can be seen as the short-term investment management that takes place as assets are transitioned from the old manager to the new.
A new White Paper from Greenwich Associates entitled "Transition Management: Too Important to Leave to Chance", analyses the approach taken by many institutional investors toward asset transitions, and discusses efforts on the part of some transition management firms to interject a new level of rigor into the transition process. It reports that only one in 10 US plan sponsors issues a request for proposals when selecting a new transition manager.
Instead, 45 per cent of plan sponsors choose their managers without a formal search or any outside guidance. Approximately the same percentage chooses their providers after receiving advice from their investment consultants. Not surprisingly, this relatively informal procedure often results in the selection of the provider that managed the plan's last transition or a firm with whom the plan sponsor has some other business relationship, such as their current global custodian.
Based on the results of their transition management research and conversations with many US plan sponsors, the consultants at Greenwich Associates recommend that plan sponsors consider the following practice as one means of implementing a rigorous and effective procedure for selecting transition managers:
Plan sponsors are advised to conduct a formal search for a handful of transition managers at a time in which the plan is not in the midst of a transition or an important investment manager search;
The plan should select firms with complementary skills and consult regularly with this close group to keep them up to date on the plan's current situation;
When in need of a transition manager, the plan sponsor should choose one of these pre-selected firms based on the product in question and the relative expertise of the managers.
"This process represents something of a practical middle ground," says Greenwich Associates' John Webster. "One reason that plan sponsors might not want to undertake a formal search for a transition manager is the fact that the plan is most likely already in the midst of a search for a new manager. In such a period, time will be at a premium, and plan sponsors will often elect to use a firm with whom they have a pre-existing relationship as a form of convenience. By having this pool of pre-reviewed and approved external transition managers, the plan sponsor can be ensured of receiving reliable outside assistance without having to devote the resources and attention to a formal search."
Measuring Transition Manager Performance
One reason why some plan sponsors have maintained a relatively informal approach to the transition manager selection process is that there is noclear consensus on how to accurately assess transition manager performance. The goal in measuring transition performance should be to compare actual results with a hypothetical portfolio in which 100per cent of assets have been transitioned instantly and without costs. However, even the most sophisticated measurement approaches are complicated by the difficulties of quantifying the many variables that need to be taken into account.
In an effort to increase the rigor and consistency of performance measurement in asset transitions, some transition management firms are promoting the "T Standard," which is intended to provide a standardized calculation. The consultants at Greenwich Associates see the adoption of a common methodology or a clearly appropriate set of methodologies for determining implantation shortfall as the first step in the development of industry-wide best practices for transition management.
"While it is too early to determine if T Standard is indeed the common measurement methodology needed by US plan sponsors for transition management, there is no doubt that the discussion of its pros and cons is exactly the type of dialogue needed to formalize and introduce some intellectual rigor to the assessment of transition management performance," says Greenwich Associates' William Wechsler.
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