The Tayside Superannuation Funds, based in Dundee on the east coast of Scotland, is a local authority fund that looks after assets of some £850m (E1.2bn), consisting of the main fund and a smaller transport fund. Both wanted to move from their traditional structure of three balanced managers that accounted for the bulk of their assets.
“We put a transition arrangement in hand to effect the move to this new specialist manager structure,” says Sandy Flight of the finance, treasury and investment office in Dundee. “We now have one multi-asset manager, two global equity managers, a bond manager and a property manager.”
The decision to change managers was taken around 12 months ago, and the period from October to April was taken up in selecting the new managers, with the help of consultants Hymans Robertson. “Following the selection, we discussed with them the transition and obtained a short list from them of possible transition specialists. In the end, we considered four candidates.”
The ultimate choice was the Goldman Sachs team in London. “The key thing for us in their reply was their concentration on our own individual circumstances and they paid a lot of attention to our assets. “The first concern for us was the security of the assets, we wanted to ensure that all the assets going through the process would come out the other end in the right hands.” The second concern was to avoid any loss of performance during the transition period, by losing market exposure from holding too much cash for a time.
The Tayside transition was more complicated than others in that there were a number of pooled funds involved and Tayside required that both the appropriate exposure and asset mix was retained right through the process, says Rakesh Manani, executive director of the transition management group at Goldman Sachs International in London, who headed the team implementing the transition.
There is a difficulty that arises because of the different settlement cycles of pooled funds and other securities, he says. “When the legacy managers liquidate pooled fund holdings, we coordinate this with the execution of underlying securities. So when selling a UK equity pooled fund and buying some overseas equities in the underlying equities, it is important that this is implemented in tandem and coordinated in real time, otherwise there is a danger you end up leveraging the fund or being left in cash and introducing risks that can be avoided.”
Being the sole coordinator, Goldmans was able to adjust the settlement cycles on the underlying securities. “As we reduced the exposure to various pooled funds, we coordinated this with the trading of underlying securities and adjusted settlement cycles where appropriate, so that by settlement day, we could ensure that the money the pooled funds generated was there in the correct account to settle the purchase of stock. This involved multiple currencies, so the currency had to be aligned as well.”
A further matter that had to considered when designing the implementation strategy was that the two funds had identical portfolios, and there were two beneficial owners. This was a complicating factor, says Manani. “We had to ensure fairness to both funds. That was a very important consideration that does not occur in all transitions. However, the technology we use enables us to do this.”
But it is not just the trading issues that have to be preplanned, he points out. “Equally important is the project management aspect, to ensure that all the operational and administrative aspects are in hand, and that there is a full audit of all the assets that come into our control and then leave.”
A significant proportion of the portfolio, involving several hundreds of millions were to be traded, as one of the three managers’ assets were being left intact, but since their cash portion was being increased, they too had to be coordinated into the arrangements, points out Manani. In all, over 800 individual equity and fixed income securities were to be handled across 22 markets and 13 currencies.
Often when pooled funds are being bought or sold, managers require cleared funds in their accounts before they will trade on behalf of their clients. “We provide letters to these fund managers confirming the cash will be there so that they can buy / sell on the day that we are selling / buying the other funds and securities, rather than wait for the funds to clear into their accounts,” he says.
Because of the size of the assets involved, no derivatives were needed. “Once we get details of the existing holdings and the target portfolios, we do a line by line pre-trade analysis of every security and look at the aggregate macro level shifts that are being made. At that point we decide if derivatives are required, typically where the markets could not absorb the size of the shift being made in a timely manner.”
In this case, Goldmans was able to make all the asset allocation shifts by day one. “So by the end of play on the first day all the asset allocation risk was off the table. In addition, we balance the purchase and sales, so that the correct asset allocation is in place and the fund is not leveraged or left in cash on an intra-day basis, because of un-coordinated trading.” There are two risk elements in the process, the asset allocation risk and that of ensuring purchases and sales are coordinated not just at end of day, but intra-day and in real time, he says. “We spend a huge amount of time on these aspects.”
The trading itself took place early in July, with over 98% of the required trade complete by end of day one and trading fully completed by day three. “There is an inevitable trade off, as if you trade too quickly, you can impact the market and costs rise, or if you stretch it out too long, there are risks in volatile markets.” The trading schedule was agreed beforehand with Tayside
The actual choice of day can be important factor – it should be one where there are no obvious features which could adversely impact trading and liquidity. “There was nothing on the trade date that looked as if it would affect market conditions. It turned out to be as expected,” says Manani.
Goldmans say they worked closely with the legacy managers managers and the funds’ global custodian, Northern Trust, during the process, with trades being reported on a daily basis to the custodian.
In addition to reporting throughout the period of the trading to Tayside, Goldmans prepared a final post trade implementation report. “This shows what we did in terms of the different pieces throughout the transition, a detailed analysis of the components of all the costs, and full audit of all of the assets.”
Beforehand, Goldmans and Tayside agreed that implementation shortfall would be the measure of the success of the exercise. “We gave an estimate beforehand and then the detailed achieved post trade costs.” Flight says that on the quantitative elements Goldmans’ performance exceeded expectations on the overall cost and on how much was achieved by the end of the first day. “The overall implementation cost was substantially less than anticipated at the start of the exercise.”
He adds: “All the managers, both legacy and incoming, gave their full co-operation, so we were pleased about that. We were very satisfied with the outcome of the whole transition process. Goldmans gave us a lot of help in an area that was very new to us. They were very rigorous about things and it clearly paid off.”