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November 1, 2003

Portfolio Transitions Are Coming of Age: Look Out for the Leaky Assets

By Philippa Bourke

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  • Portfolio Transitions Are Coming of Age: Look Out for the Leaky Assets
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Tread carefully on moving day when your desk transfers assets. Keep an eye on those portfolio movers. Some of them could manhandle the merchandise.

This is the message that professionals are sending in the booming $2 trillion a year portfolio transition business. It's a global industry that is thriving because client needs and expectations have dramatically changed.

Not so long ago, institutional portfolio rebalancings and hotshot manager hirings normally triggered a transition. Now investment performance is a bigger reason for a move. Pension funds, for example, savaged by bear market conditions, have missed actuarial assumptions for the past three years.

But watch closely because some of those assets could be lost in a bungled transfer. And vital information about these portfolios could "leak out" in the process of a transfer.

"Transitions should be information-less trades," said Lisa Manuele, a managing director of transition management at Bank of New York. "Their process delivers an extremely high level of control and confidence to clients because of its infrastructure, combined with a strong conflict-free, advocacy position."

The bill for a leaky transfer could be huge unless the client is vigilant, counts the pennies and knows how to ask the mover the right questions.

Here's how Minder Cheng, a managing director as well as global head of equity and currency trading at Barclays Global Investors, put it: "We will look at the legacy portfolio and the target portfolio we're looking to get into, and then map out roughly what is the optimal strategy."

For BGI, that strategy might involve crossing networks and factor in the number of days it should take to complete the deal. It might involve outsourcing some basket or program trades.

BGI is a significant player in the transition business. It recorded some 120 transitions in the last four years. To appreciate the scale of these transitions, 27 of these deals involved client portfolios in excess of $5 billion each.

The stakes in this business are rising because finicky clients today aren't just waiting for a manager to leave to transfer assets. Now they are quicker to pull the trigger. For example, Frank Russell Securities, one of the big providers of the portfolio transition service, has seen its business explode. In 1999, it executed 108 transition deals worth some $43 billion. Last year it was 434 worth some $144 billion.

But while clients have become more demanding and assets have become more mobile, there is a problem. The portfolio transition is virtually a Wild West of the trading business in which almost anything goes. That's because standards for this once relatively insignificant business have yet to be established, although there have been suggested techniques.

Nevertheless, clients without benchmarks could be left shaking their heads at the end of the process just trying to figure out how they've done.

In the absence of a portfolio management transition bible, a Russell official argues that his firm's standard is a reasonable way to measure these transactions. The implementation shortfall (IS) should be used, according to Robert Collie, a director and mathematician for Frank Russell Securities. It is a standard by which providers can be held accountable for cost overruns.