Following a year of scandal and crisis, a semblance of clarity returns to the transition management industry.
"Oddly enough, perhaps the most controversial topic of the last six months in the institutional investment space has been controversies in the often-staid business of transition management." That's how aiCIO announced the launch of our Transition Management Survey, which was previously conducted by our sister publication PLANSPONSOR. That statement was not made without evidence: As reported by this publication, firms such as State Street and Convergex have recently experienced problems (of varying seriousness) with their transition managementservices. Yet some respondents were in an argumentative mood. "Your assertion that 'the most controversial topic of the last six months' has been transition management raises a smile," noted one British pension commentator, adding "I'd hope that most institutional investors had more macro level concerns!" While there are certainly larger concerns, aiCIO would argue—self-servingly, perhaps—that few controversies are as juicy as transition management. Also, it can easily be argued that it was partially this very attitude—that transition management is a minor blip in the larger scheme of investing, an operations issue removed from CIO focus—that allowed such controversies to fester.
The survey's results suggest that these controversies have had an effect on investor sentiment toward this business. While it is difficult to directly compare this year's survey to those from previous years (due to numerous changes from the PLANSPONSOR version), a snapshot of transition management user opinion shows a general distrust of this industry. Asset owners generally give themselves high marks for their understanding of the transition management business, but their views on providers are less rosy. ("I suspect these self-ratings are still too high," says industry veteran Stephen Glass of Zeno Consulting, adding "that causes me concern, because it suggests fund fiduciaries have a false sense of security, with all the risks that implies.") When asked to rank their trust in the "transition management industry as a whole" on a scale of one (no trust) to five (complete trust), the average respondent gave a grade of 2.9—slightly below a neutral rating. This relatively low ranking is reflected across asset size, asset type, and geographically—with slightly lower rankings given by corporate defined benefit and European plans, which is not surprising considering that the most prominent transition troubles occurred in the European corporate space.
This relative lack of trust does not imply a lack of demand, however: All in all, various drivers are pushing asset owners to continue, or even increase, the rate at which they transition assets. The year ending December 31, 2011 saw 47.5% of all respondents reporting more transitions than the year before, with only 30% reporting less. (The average respondent reported 4.6 transitions over this time period.) The major reasons for such transitions: asset allocation shift (60%) manager performance (49%), and the restructuring of the fund (38%).
So, what is the outcome of low trust levels and high usage levels? There is a general sense that more regulation of the industry is needed. On the one-to-five rating scale (five being "much more regulation"), respondents averaged 3.65-suggesting a robust willingness to see the transition management industry regulated more. Of course, as one commentator put it, many people are in favor of regulation before they see how onerous it can be.
It is clear that this industry—whether or not you agree with the aforementioned pension skeptic—is in flux. Scandals have, rightly or wrongly, led to low levels of trust and high levels of desire for regulation. Overlay this with an increasing demand for transition management services, and you get an industry ripe for change. As a magazine that (perhaps oddly) cares about transition management a fair amount, here's hoping it's change for the better.
Methodology
Methodology: Responses from 201 asset owners were accepted for the survey over a period of three weeks, ending May 22, 2012. aiCIO would like to extend a special thank you to all those that submitted responses for the survey, as well as those vendors, asset owners, and consultants who helped the aiCIO editorial and survey teams construct the survey. For more information, contact Quinn Keeler (qkeeler@assetinternational.com, 203.595.3270).