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September 10, 2007

No Easy Options for Transition Managers

By Gregory Bresiger

The recent volatile markets illustrate the potential dangers and contradictions of executing portfolio transitions, managers say.

In a declining market the client who needs a portfolio transition faces this dilemma: Do it now and possibly get hit with high tracking costs or wait a few days. Later could mean a big loss in portfolio value, says a transition executive.

"You become involved in a guessing game. And over a short period of time, making these market timing decisions, can go against you and have performance impact on the portfolio," according to Brian Roberts, director of transitions, in the Americas, for Russell Investment Group.

The markets' recent woes have not affected the firm's transitions, he adds.

But Hari Achuthan, head of strategy and sales for transition management at Credit Suisse, says sometimes transitions can be delayed. But that's only when clients are worried about market conditions and will give the transition manager more time.

"We haven't put off any transitions. But we've sometimes taken a little more time," Achuthan says. "When you have high volatility, then managing a transition can be challenging, especially if we are speaking about actively managed portfolios." However, he adds that no one has let the markets and their potentially higher tracking costs cancel a transition. That's because clients often have mandates to move assets.

Achuthan says, that as a general principle, there is a good time to execute a transition. It is mid-month, from the 5th to the 24th, instead of at the end of the month or the beginning, from the 24th to the 5th.

Credit Suisse transition officials studied three passive indexes from 1998 to 2006. Volatility numbers for the three indexes for the end of the month ranged between 40 and 87 basis points more than for the middle of the month, they said. Still, Russell's Roberts says he's skeptical about such studies. Roberts says it is unlikely that there is any one time of month that would be consistently good for transitions.