Flying below the radar
The E400m Belgian industry-wide construction scheme, FSE-FBZ, finished a major asset transition in May last year.
The scheme is essentially a social fund, of which part will become a pension fund in the future. It was due to this change that restructuring was being undertaken. Because of the size of the changes the scheme was making, its board decided to cut the transition into three steps so that they would have to opportunity to stop the transition in between for any reason. “They felt more in control like this,” says Ann Devos, investment officer at the fund.
The changes were made because of poor investment performance since 2000. At that point it had been decided to outsource management to five active managers with identical balanced mandates - 50% world equity and 50% Belgian government bonds.
Another reason for the shift was the fact the liability structure was to change as a result of the new Vandenbroucke law. “The board of directors decided that the fund could no longer bear the risk of 50% in equity,” says Devos.
All considered, the fund arrived at a strategic asset allocation of 20% equity and 80% bonds, with both categories well diversified geographically and by issuer.
“On the basis of an analysis of the performance of the existing portfolios we also decided to go from balanced mandates to more specialised,” says Devos. “We gave the bond mandates to those who had proven to manage this very well. For the equity mandates we decided to give this to two of our managers who had proved to make good asset allocation decisions.
“We did not only reallocate the mandates but also the amounts. The managers who had a bad track record since the inception lost part of their assets to the ones who had better track records.”
When it came to choosing a transition manager, the fund decided to work with its existing custodian, the Bank of New York.
“Of course we did check beforehand their capabilities in this field. Based on the contacts we had with the transition team in London and New York we were very confident they would do a good job.”
Keeping the same custodian had several advantages, says Devos. They already had the portfolios in their accounts, so there were no additional transfers; they knew the managers and vice-versa; and above all, the fund had just one counterparty, which, says Devos, would make life easier for all at the fund.
Overall, the fund was very satisfied with the costs of the transition. They were lower than expected and much lower than if they had done the restructuring without a transition manager, says Devos.
Are there any lessons learned from the experience? “Communication is of utmost importance, as well as co-operation between all parties,” says Devos. Good preparation and planning is vital for the success of the operation, she says.
Scottish local authority fund, Tayside Superannuation Funds, underwent a major asset allocation shift in 2003. The funds – consisting of a main fund and a smaller transport fund – have assets of around £830m.
Both of the funds were to set move from their traditional balanced manager structure. Following the transition, they now have one multi-asset manager, two global equity managers, a bond manager and a property manager. Once the decision had been taken to change managers, the Tayside fund went about finding an external team to manage the transition.
“We used Hymans Robertson as investment consultants,” says Sandy Flight of the finance, treasury and investment office in Dundee. “They gave us a short list of three managers. We invited these three managers to tender directly to us and from the replies selected Goldman Sachs.”
The whole transition process took about two and a half months from the initial invitation to tender until the implementation of the transition, he says. But once the assets were in transition, the process was completed very fast. Ninety-eight percent of trading was completed on day one, says Flight.
The prime concern was to ensure that all assets were accounted for throughout the process and nothing was lost. The secondary consideration was, he says, that the fund did not lose out through being out of the market during the process. So the fund stipulated to the transition manager that the appropriate exposure and asset mix should be maintained right through the process.
In the event, nothing did go wrong. No assets were lost during the process and exposure was maintained to minimise potential to be out of the market. “We were very happy with the whole process and it couldn't have gone better,” says Flight.
This outcome was helped by the fact that the fund had clear objectives and was very specific about final outcome they wanted. They were also able to get full cooperation of all fund managers involved, says Flight. For Goldman's part, the team was very well organised and kept communication open at all stages both to update Tayside with what was happening and to make sure they were happy with the progress.
In a transition of assets, it is important, says Flight, to be totally clear what you want, and to keep communication going so that the focus remains on this.
The London-based Medical Protection Society – which gives advice and indemnity to doctors facing legal problems - is transitioning £200m (e290m) of assets out of the society’s total assets of £600m. As transition manager for the assets, the society has chosen State Street.
Simon Kayll, finance director of the Medical Protection Society says State Street was picked because it had already been selected as investment manager for the assets. The assets in question are all of the society’s equity holdings, which are all being switched into an enhanced index mandate managed by State Street.
Currently, some of the equity assets are held as actively managed investments by another manager, and some are invested passively, managed by State Street.
Kayll does not believe an institution necessarily needs to use a specialist transition manager for changes in asset allocation and/or manager. It all depends on the complexity of the transition, he says. In the past, the MPS moved some of its bond holdings, but did not consider that change warranted engaging a transition manager.
“We are lucky that State Street do have that capability,” says Kayll. Many asset management groups do not, and if this had been the case for MPS, it would have been necessary to look elsewhere for transition management services.
The society has already been given information on the cost of the transition, but the exact cost cannot be known until the shift is over. “I know what the deals will cost,” says Kayll, but whether this can be reduced depends on how much crossing State Street is able to do.
Like any investor about to move major assets around, Kayll does have concerns. “We have concerns that they get it right, in the right place and at the right proportions as determined by our strategy… without exposing us too much to the market movement,” he says.
He is also concerned that the transition should be cost effective and that it doesn’t create an administrative nightmare. “And that we can see what’s happened – a degree of transparency is important,” says Kayll.