Slipping silently into the markets
While the appointment of 15 investment managers to manage e7bn in assets is in itself no mean feat, the transition of the lion’s share of the assets from cash deposits to market via 14 different investment briefs left the NTMA – in conjunction with Watson Wyatt, the consultant appointed to advise on transition manager selection, with another important decision – selecting the right transition manager for the job.
Following the same stringent criteria applied to the investment mandate RFPs, the NTMA finally opted for Morgan Stanley to transfer the e7bn in assets that were to be outsourced – the NTMA itself retaining a e1bn eurobond brief.
Gareth Derbyshire, executive director in Morgan Stanley’s European Pensions Group, explains what he believes the NTMA was looking for in its transition selection. “I think the main criterion was getting the assets transitioned efficiently without the market knowing. As a result, I believe the NTMA wanted to have a team with the appropriate experience. They wanted to be confident that the regular flow of assets of the house they selected would be big enough so that these amounts could be disguised. I think that was an important factor in the decision.”
Derbyshire notes that because Morgan Stanley’s daily flows average around e1.5bn globally, careful planning meant that even this large transition could be executed without drawing attention. “Beyond that, the NTMA did a lot of due diligence, they spent considerable time in our offices examining and verifying our processes – and Ronan O’Connor [head of portfolio construction and risk management at the_NTMA] observed much of the trading on-site.”
Derbyshire believes that his firm’s client-centred approach also helped. “We have a room dedicated to the Strategic Transition Unit (STU) and the fact that Ronan could come in and sit through the process was, I think, also a reassuring factor. Clearly an investment bank has a lot of business going on within its walls and I think it’s important for clients to know that the internal Chinese Wall procedures are effective and that the transition is being handled in a confidential manner.”
He explains that the transition itself had both complicated and relatively easy factors attached. “The number of managers involved made it challenging, but the fact that we were moving from cash to mainly equities in developed markets made it structurally easier than if it had involved a number of managers being replaced with complex emerging market mandates, for example.” With a substantial part of the transition shifting to passive mandates, Derbyshire notes that the positions in each stock were also manageable – another simplifying factor, although the sheer number of stocks posed a further challenge.
“This all needed careful planning, especially given the large number of stocks being bought, but the diversified nature of the portfolios has meant that liquidity has been less of a problem. The real challenge was co-coordinating the number of parties involved, particularly in making sure the shape of the transition was maintained.
“What I mean is that, within each tranche, you want to execute the positions proportionally; for a global mandate, for example, you don’t want to buy all the German stocks before starting on the French stocks, because this can compromise the performance of the portfolio during the transition period.” Derbyshire also flags up the challenges of reporting such a transition, but describes these as ‘manageable’ as long as the planning is thorough.
The NTMA has yet to transition all its assets through Morgan Stanley due to the current market climate, but the bulk of the work is done and seems to have gone to plan. “What is gratifying from our side is that the market didn’t pick up what was going on. We scoured the newspapers and newswires around the transition dates and it was clear the markets had no idea this was happening. We felt it went very well.”
He ends by explaining the significance of the NTMA mandate win to the house. “This is a prestigious mandate and it is clear that the NTMA went through an extremely thorough search process. To have been selected is highly gratifying.”