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Moving assets: It pays to hire professionals

Whether you’re changing investment managers or moving house, it pays to hire professionals to help manage the transition. Here we look at how transition managers can liquidate assets thoughtfully with an eye toward minimising the performance and cost impact, says Russell Investments.

In a rush to de-risk, many pension schemes are potentially missing out on substantial cost savings.

Selling, buying and moving homes is complicated. Most end up hiring professionals to broker the property transactions and move their belongings. Few would ever consider selling all their household possessions as a job lot on Ebay and then replace everything with new goods. It might make things easier, but they would be squandering tens of thousands of pounds.

Is there a risk that many institutional investors might make this mistake when moving between investment managers?

Manager consolidation and pension de-risking has led to a massive wave of manager transitions. Since the financial crisis, equity markets have generally performed well, and funding ratios are now healthy. It’s no surprise then, that many pension schemes are moving assets into or within fixed income to lock down their liabilities. In fact, according to recent research, pension schemes look set to shift hundreds of billions over the next five years ¹. That’s a lot of money in motion, and if these transitions are not managed wisely, it could end up costing these schemes billions of pounds in potential investment income.

Today, transition management is routinely used for the equity portion of many pension scheme portfolios. Yet, the use of transition managers when shifting assets to and within fixed income is still rare.

In most cases, defined benefit schemes that are de-risking move into long duration fixed income strategies over an extended period of time. Unfortunately, some investors and asset managers have not historically been diligent in the transition of assets to these strategies. This has often taken the form of lost market exposure, i.e. the investor leaves assets uninvested until the new manager can invest the cash into a complete fixed income portfolio. However, this can take a considerable amount of time.

This uninvested cash means lost investment income – especially when compared to yield-rich long duration credit. And scheme performance can suffer as a result. The yield ‘give-up’ that investors might incur during the transition process would only increase if the yield curve steepens. And we believe it might do just that in the near future. This income loss is even greater for riskier assets like high yield and emerging market debt.

Every time you give uninvested cash to a fixed income manager, you should assume your scheme loses about one basis point of investment income for every day that the cash remains uninvested.

Most long duration fixed income managers take weeks to complete their portfolio, and the income loss can grow to 15 basis points — or even higher — during the transition period. Multiply this income loss by the hundreds of billions expected to move in the coming years and this lost income could easily be measured in billions of pounds.

These losses can be mitigated with proper implementation. Giving the current portfolio or cash to the incoming investment manager doesn’t always align the interests of the manager with the goals of the scheme. New managers are generally not held accountable for portfolio performance during the portfolio transition period. This is commonly referred to as a performance holiday and can often lead to situations where operational convenience dominates the decision-making process, rather than investment outcome.

Whether you’re changing investment managers or moving to a new house, it pays to hire professionals to help manage the transition. We believe the best way to avoid this performance slippage is to employ a specialist to manage the transition of assets from current investment mandates to new ones.

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¹ Mercer (2018) “European Asset Allocation Survey Report”

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