A Delicate Dance: How Top Transition Managers Move Assets in Troubled Times

Last year was a smooth skate in the markets. This year, not so much. How do transition managers, who shepherd investments from X to Y, navigate such treacherous waters as 2022’s?

Transition management involves the delicate business of moving a pension fund or other owner’s assets to a new manager after the owner has decided to make a change. It also involves re-allocating assets in-house for a client, redeeming holdings, deploying new capital and performing myriad other tasks that affect untold billions of dollars.

How do transition managers do it, particularly during these unsettled times? Given TM’s high stakes, equal measures of diplomacy, market intelligence and execution prowess come into play. This is not an easy dance.

For instance, let’s say an asset allocator in a time of turmoil, such as now, wants to move away from a falling position despite the risk of losing money on the investment. William Cobbett, Citi’s managing director of transition management, says optimizing the sequencing of the transactions is crucial. Furthermore, it is imperative to stay nimble: “Our initial strategy may have forecast getting 75% complete on the first trade date, but due to market conditions we may do just half to balance impact cost and opportunity cost,” he says.

Certainly, large transactions risk being noticed and that affects the price. On the other hand, giants such as Citi have the global reach, scale and ability to execute rapidly. “For example, a transition might be overweight in the technology sector,” he adds. “But with our global presence, having traders in 80 markets around the world, we can rapidly access local liquidity to bring down this risk.”

Time is of the essence in these deals. As Russell Investments says in a report, “transitions are, in effect, short-term asset management assignments and a single day’s performance can be the difference between a successful transition and a performance setback that can take years to earn back.” The average transition trades for only three to four days, the report says. “So a single day makes an enormous impact on the event.” 

Citi, which has 150 TM clients, prides itself on its ambidextrous transactions, which may involve disparate assets ranging from emerging market credit to U.S. small-cap stocks. Citi has a particular specialty in fixed income. “We trade in all” asset classes, Cobbett says.

The important thing, whether markets are rough or smooth, is “to keep the lines of communication open on how and when we trade,” Cobbett says, and “to know who to call and who to alert” to make a transaction happen.

The people part of the business is key. “The starting point is understanding what the client wants to accomplish,” says Grant Johnsey, who has managed transitions at Northern Trust Capital Markets for more than 20 years. “Understanding their goals helps us determine the best approach and timing when building the trading strategy.  When markets are volatile, it is a particularly critical first step.

Some clients may be committed to making changes, but then decide to delay. Johnsey, now head of integrated trading services for the Americas, takes that moment to show the client the implications of waiting. “We ask whether they expect [the outcome] to be better or worse” than the current circumstances, he says. “Then they realize they have to do it now.”

For clients, Johnsey breaks down the risks for each type of transaction, be they macro (major economic drivers such as inflation), factor (styles on the order of value, quality and momentum) or a stock in one company (fundamentals are paramount—revenue, cash flow, etc.).

Further, buying in a down-market interlude presents strategy questions. Example: Buy on the dips, or spread the purchases over time?  “Most people want to buy now,” although that might be unwise, he says.

One tricky interlude, for instance, is when money is being sent to a new manager from an old one, known as a “performance holiday.” The new manager has yet to assume responsibility for the incoming assets, so the transition manager assumes that temporarily. This way, as Russell Investments says in another paper on TM, “there is no gap in performance history.” TM providers often use hedging tools to make things run more smoothly and mitigate risk.

In our last TM survey, covering 2020, 59% (up from 53% in 2019) of asset owners reported “manager underperformance” as the main reason for their shift. Indeed, 2020 was a rough year in the markets, somewhat akin to today. The first half of 2020, when the S&P 500 took an epic dive with the onset of the pandemic, saw almost as many transitions as all of 2019. The emphasis then was on smaller transactions, mainly to rebalance.

In 2022, volatility and risk are high. As a result, one thing in the TM trade is for sure, Johnsey observes: “There’s a lot of uncertainty.”