Interim Solutions 

In early December 2022, Global Investor brought together the industry’s leading transition managers and consultants to discuss some of the key issues affecting clients including costs, the impact of interim solutions, the evolution of data analysis, and how business models are adapting to market conditions.

A portion of the 2023 Transition Management Roundtable is available in the video above. See below for a transcript of the highlights. 

Amelie Labbe: How much of a role are interim solutions playing in the transition management space?

Paul McGee: We continue to see the need for interim solutions for a number of reasons. It may be that a client has had a manager on watch for underperformance for a period of time and has now decided to pull the trigger and terminate the mandate. However, they may not be there yet in terms of deciding who they are going to appoint or with the legal documentation, potentially even when they have identified who they would like to appoint.

Equally, we might see a so-called emergency exit situation where there may have been a team lift-out from an investment management house, the departure of key staff or a star fund manager, or even a corporate scandal where the client has lost faith in the management of the firm they have appointed.

The ability to offer a temporary home for the mandate and buy the client some time to make an informed decision is very valuable. We can put that client into a safe, stable, low risk mandate of their choosing.

Chris Adolph: We had an example of team lift-out this year where a client had literally just gone through the process of hiring a new manager and allocating a large amount of money into emerging market debt. The manager was only in place for a month and a half when the whole team was lifted by another asset manager.

Within a week or so we were having a conversation about transition because we had pitched for the original event and the client came back and said they now needed something else.

This process can be relatively quick, but if you have to do other things like go through an onboarding due diligence process, you are having to squeeze due diligence that might normally take months into a very short period. I think we went from having a conversation to looking at transferring assets within a month, including a due diligence visit.

What you tend to do is a number of different scenario analyses to find what suits – some clients might want to go almost completely passive; others will take the view that there is no point since they taking all that risk off and then going to have to transition again into a new portfolio. What works for the client is key and transaction costs often sit right in the middle of that.

David Edgar: This is one of the reasons why we suggest that clients set up a panel of transition managers. If they do find themselves in this situation, they can move quickly - if they have the panel in place, they can just pick up the phone and get it done.

Andy Gilbert: We have occasionally seen clients that have looked at the tracking error tolerances of their mandates and have wanted to reduce them. The key factor here is that the interim management proposition is suitable for the client’s needs.

Prior to undertaking the assignment, it is just as important to explain to clients what interim management is and what it is designed to do as what it isn’t. Essentially, it is just a bridge to manage exposure until they’ve found the most appropriate home for those assets going forward long term. You are putting guardrails around the portfolio that meet an investment objective that that client has, and that objective can change.

The landscape is changing and complexity is increasing in the context of interim management. For example, in some European jurisdictions sustainability requirements have appeared, adherence to SFTR regulation is mandatory and the reporting that goes with it comes into play.

There is no plug-and-play approach here, you really have to work with your client in advance to fully understand their exposure objectives and have the in-house capabilities to support that, whether it be through reporting, monitoring, adherence to regulation, etc.

Chris Adolph: That regulation point is important. It is sometimes why not everyone offers interim because if you think of your typical transition and how you manage it (and with some of that reporting in the guidelines) we have a very limited discretion on what we can do. In interim we are selecting the portfolio and how we construct it, acting much more like an asset manager, so the onus on us becomes much more like that of an asset manager than a transactional exercise.

It can add up to a lot of monitoring and if you are only going to be managing for a couple of months you might ask whether you want to go through all that reporting.

James Woodward: I think one of the applications of interim that we have seen this year is in the context of asset location. Significant negative returns in some asset classes have caused asset owners to think they need to rebalance.

When rebalancing, there might be a particular asset class where the asset owner needs to implement a temporary tilt or beta exposure until they can find a more permanent home for an exposure. We have often undertaken research to examine the types of benchmarks clients are looking at and the tracking error that was mentioned before to find the best solution until they can suitably apply those monies down to a long-term manager.

Cyril Vidal: I view the transition manager like a toolbox. We have the ability to provide execution, the operational capability with having the authority on an account that has custody, and we also have a structuring mindset where we can come up with some bespoke reporting.

There are many occasions where this skillset is probably not necessarily well known to our clients and sometimes we find situations where they didn’t intend to appoint a transition manager for a specific situation but we have been able to take something off their hands to solve for complexity because we used part of that toolbox to find a solution to their problem.

David Edgar: That is a great point – the breadth of knowledge that sits within a transition team is quite exceptional because they have to cover every asset class, the back office, middle office and the front office.

James Woodward: I often think of an asset owner having a transition management agreement in place as a bit of an insurance policy. In all these situations we have described the interim service can be that stop gap if they need an emergency set of exposures implemented. It really is a value add, a necessary piece in the armoury of an asset owner.