(hint: the correct answer is more than one)
Asset allocation is an essential part of every institutional investor’s strategy. But it is also an occasional activity for most, with months if not years between events. So, when events arise, it is common practice to look to the transition management community for guidance and assistance on the best approach to implement the change while minimizing costs and risks to the portfolio.
Given the infrequency between events, asset owners may not always be ready to ask the most pertinent questions for the event. And, to be fair, these questions change based upon the unique structure of each transition (or asset allocation) event.
While the phrase can be overused, there is no “one size fits all” solution for transitions; there is rarely just one solution possible.
Recently a client approached us with a transition to move from an active (separate) account to a passive (commingled) fund. They asked for guidance from at least one other provider and received a single solution. In comparison, our response included seven strategies, ranging from near-instant equitization to a more delayed trade implementation. In each strategy, we outlined the requirements, the risks, and the benefits.
Some of you may be thinking, “Seven strategies?! I bet this was for a large event.” It was for a $30 million event – small for some, large for others. While an event’s size can play a role in the range of solutions, it should never be a factor in a transition manager’s engagement or service level.
We view transition management as a collaborative and consultative process between the provider and the client. By providing a range of solutions, we empower our clients with sufficient information to make the best decision available. When both parties agree on a solution, engagement is better, and the shared responsibility and alignment of interests is notably higher.
As an asset owner, how do you ask for and get the best range of solutions for your event? To get started, here are a few categories. With this information in hand, a transition manager should have sufficient information to create a risk- and strategy-driven solution for the event.
Scope
Understand the moving parts of the event, including cash or alternative vehicles (e.g., private equity), which you make this is out of consideration for the transition – the more complete the picture, the better solutions you will receive.
Timing
Identify any specific deadlines or requirements for the event. When identifying solutions, it is crucial to understand any drivers to the event and its implementation (e.g., fund deadlines, pre-funding notifications, participation disclosures).
Assets
At this stage, specific holdings are not required (although always helpful). However, understanding the composition of the portfolios will allow for a better solution relative to market and timing exposures. If a client is moving from fixed income to equity, our solutions should differ from that of a US Large-Cap to US Large-Cap equity event.
If you want more information about our approach to transition management, please email us at bjenkins@capis.com or call 312-206-9308.
For questions or to learn more about CAPIS, please reach out to [email protected] and follow us on Twitter (@capisinc) and LinkedIn for more updates and insight from our team.
