UK – Pension funds should demand complete disclosure from transition managers regarding how much revenue is generated from a transition, according to the Russell Investment Group.
This is in a bid to enhance the transparency and accountability of transition managers.
“I believe there is a significant lack of transparency today in transition management,” said Russell portfolio manager Sam Lundqvist, speaking at a Russell seminar in London.
“This can negatively impact the value of assets.”
A spokesperson for Russell told IPE: “Pension funds should request that transition managers fully disclose all sources of revenue that the firm (including all its affiliates) is generating from the transition event.
“In addition, clients should insist that the T-Standard be applied when performance is measured during the transition event, said Russell. This is a standardized method for the calculation of portfolio performance during a transition.
“This will ensure that the client is provided with a performance report that accurately covers the period between the termination of the legacy manager and the new target manager assuming responsibility for the assets.”
According to Russell, the lack of transparency and accountability can in part be attributed to an increasing number of transition management providers with differing business models. This has created a very competitive market place for transition management and corresponding pressure on the explicit fee quoted.
It added that a recent study of the transition management industry revealed “the generation of three times more revenue from undisclosed sources, than that explicitly disclosed”.
“One obvious concern is that these undisclosed revenues are likely impacting the value of the clients' assets,” said the statement.
Russell also stated it was important for transition managers to fully disclose potential conflicts of interests to clients.
According to a recent study by the Chartered Financial Analyst (CFA) Institute, roughly 87% of respondents felt the Chinese walls currently in place at broker dealers offered insufficient protection of confidentiality of agency trades from the proprietary desk.
“This information leakage could lead to a significant price-disadvantage of the client and subsequently impact the performance of the client's assets,” said a Russell spokesperson.