Executive summary:
- Once a decision has been made to make fundamental changes to a portfolio, institutional investors need to weigh the costs associated with the risk of waiting for those changes to be implemented.
- By implementing an interim strategy, asset owners can manage risk and costs more effectively while the full transition process is underway.
- Interim transition management typically involves setting up an interim mandate, defining guidelines, and managing the portfolio until the final transition is complete. This can often be done quickly and with minimal disruption.
If the seesawing U.S. general election is a reminder of anything, it's that investors can never be certain of what is going to happen in the world.
A portfolio that might have been appropriate six months ago might not be six months from now. For institutional investors, adapting portfolios may be necessary and could be the result of poor manager performance, a portfolio manager lift-out, or the winding-down of specific investing strategies.
Yet, while these changes may well be the correct ones, they are rarely timely, and like the U.S. general election, might not always go according to plan.
Manager searches take time, with an extensive due diligence and governance process. A manager that was meant to be onboarded last month, could easily slip into being onboarded next month, or the month after. Who knows? In that time, maybe there is a new election candidate, a new party enters the White House, or geopolitical tensions escalate, resulting in market volatility.
Crucially, once a governance committee has decided to make fundamental changes to their investment portfolio, it's not only the cost of the change they need to factor, but also the cost associated with the risk of waiting for those changes to be implemented. If the handover isn't expected to be quick, we believe trustees should consider adopting interim asset management solutions to avoid being trapped with an asset manager they no longer have confidence in and subject to market forces they may not be positioned for.
Interim solutions
One of the key aspects of transition management is the concept of interim solutions. By implementing an interim strategy, asset owners can manage risk and costs more effectively while the full transition process is underway. This helps to ensure that the portfolio is not exposed to unnecessary risk and helps to minimize implementation shortfall—a measure of the cost incurred due to delays and market movements during the transition period.
Yet, despite the benefits, interim transition management is not universally adopted. Some clients view it as an additional decision or fee, which can be a deterrent. However, interim solutions can lead to cost savings compared to maintaining an active portfolio during a lengthy transition process, while providing more complete governance of the portfolio performance.
The benefits include:
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Risk management: Interim solutions help mitigate risks associated with market fluctuations and ensure that the portfolio remains aligned with the asset owner's objectives.
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Cost efficiency: Avoiding high active management fees for a prolonged period of time with a manager that has lost the confidence of the plan.
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Timeliness: Interim strategies can reduce the time it takes to complete a transition, allowing investors to reach their target allocations more quickly.
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Improved governance: By implementing aspects of a manager or strategic change in a more timely fashion, interim solutions enable the managing group of an investment portfolio to demonstrate to their governing committees timely implementation of core strategic decisions and cost savings.
It's easy
For clients considering interim transition management it's important to understand how easily these solutions can be implemented. Typically, the process involves setting up an interim mandate (usually with minimal changes to an existing transition management agreement), defining guidelines, and managing the portfolio until the final transition is complete. This can often be done quickly and with minimal disruption.
The flexibility of interim solutions also means they can be tailored to fit the specific needs of the mandate, whether it's through security-based or derivative-based approaches. This ensures that the portfolio remains aligned with the asset owner's risk and return objectives throughout the interim period.
In a market environment where risk and cost management are increasingly scrutinized, interim management is a service institutional investors should consider. While interim management may not be necessary for every transition, we believe it provides an effective option for managing risk and minimizing costs during periods of significant change
For any entity undergoing or anticipating investment transitions, interim solutions could be a strategic move to ensure a smoother and more cost-effective journey.
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