Transition in transition
The BlackRock-BGI merger is just the biggest whirlpool in a transition management industry in flux. Brian Bollen examines the intersections between evolving businesses and processes
When the merger of BlackRock with Barclays Global Investors is run as a transition management front-page story - as it was by one publication - you know that the landscape of this normally tranquil corner of investment services is changing radically. But questions are already being raised about whether, purely in transition management terms, one plus one equals three in this instance. Will there be streamlining to accompany the consolidation? Job cuts? Or are the businesses so complementary that there will be little or no overlap?
There will, of course, be tangential implications for transition management at both houses and for the broader market, but as one market player puts it, "transition management would not have featured in the merest way in consideration of the merger - not at all." For what it's worth, the same person believes that there will be huge overlaps and departures from both transition management teams. This could create new hiring and business opportunities for expansion-minded houses, should the integration process turn the focus inwards at the expense of client care and business development.
Might some of those hiring opportunities appeal to Bank of New York Mellon, which seems to be intent on hoovering up talent? Recent additions include the former Russell Investments transition specialist Sam Lundqvist, and the Tim Wilkinson-led transition management team that found itself surplus to Citigroup's requirements after it decided to exit the market. Other financial groups to have exited the market in recent times include Bear Stearns, Lehman Brothers, RBS and UBS. Six people from Bear Stearns found a home at JPMorgan, taking with them a specialist fixed income execution capability that expanded JP Morgan's offering.
Reports of the death of Credit Suisse's transition management ambitions were greatly exaggerated it seems. Steve Webster, formerly of RBS (where he found himself employed rather accidentally following its purchase of ABN AMRO), now heads transition management in EMEA. The industry's assumption that they had exited the market after Graham Dixon and Ricky Boomgaard left, turned out to be wrong. In fact, the team completed what is thought to be Europe's largest ever transition and has made a number of further hires recently.
Graham Dixon, one of the recognised fathers of transition management (there are so many that we probably need a DNA test) joined quantitative performance analysis firm Inalytics. He is also working to introduce new standards to measure transition management performance in what is essentially a complementary initiative to the T-Charter, to which he is also closely linked.
The visible changes taking place in the industry not only reflect the financial turmoil of the past two years, but also the slightly less obvious changes in emphasis taking place as transition management comes increasingly to be viewed as a form of asset management in its own right.
Russell Investments argues that because of the length of time the process can take and the level of fiduciary care always needed, transition management should be properly defined as interim portfolio management (IPM), something more than just an exercise in execution. Clients routinely express the need for stability, longevity, and consistency of service from their IPM providers. "The traits that clients value are not what broker-dealers are equipped to provide," says Ian Battye, responsible for Russell Investments' transition management in Europe.
The quality and cost of transition management is certain to come under intense scrutiny in the months ahead, if Mellon Transition Management (MTM) at BNY Mellon Asset Management is reading the runes correctly. Mark Keleher, MTM's CEO, expects demand to surge as the number of transitions executed in the third and fourth quarters of 2009 reaches record numbers thanks to pension funds and endowments replacing asset managers - there was a more than 40% increase in the number of pre-trade inquiries during the first five months of 2009, and a substantial jump in executed transitions in Q2 versus Q1. Pre-trade inquiries carried out by institutions to gauge the costs and risks of switching managers have proven to be a good predictor of transition activity in the past, often leading actual transition activity by several months. "While the business has been increasing all year, institutions are significantly accelerating the number of asset managers they are replacing," Keleher says.
Société Générale Securities Securities made a similar forecast earlier this year. "It is now clear that a growing number of clients are beginning to appoint professional transition managers to cut costs and better manage risk," it said. "As consolidation unfolds in the asset management industry, and investment portfolios begin to show the need for major restructuring following an extraordinary period of market turmoil, transition managers could find themselves even busier in 2009. Investors who are unfamiliar with the concept and the practice need to exercise great care when considering such an important appointment. They need to avoid potential conflicts of interest wherever possible and take into account their new provider's prospects for survival at times of unusually extreme market volatility."
Any discussion of transition management inevitably turns to the question of which is better, the fiduciary model or the broker-dealer model. Some argue that the broker-dealer model, with apparently embedded conflicts of interest, is irreparably broken. If so, others counter, why is it currently being used by a number of major players? And why are some transition managers who support the fiduciary model already broker-dealers themselves or becoming broker-dealers?
The fiduciary model is more transparent, as the transition manager's clients are made aware of how the transition manager is compensated, MTM's Keleher argues: "The fiduciary model helps protect clients from the often opaque pricing and conflicts of interest inherent to the broker-dealer model of transition management. Market share gains by transition managers following the fiduciary model led to the exit of a number of broker-dealer transition managers over the last 18 months."
Lachlan French, head of transitions at BGI, says: "Given the fragmentation that we have seen in the market as the number of trading venues and market counterparties change, asset managers are in a better position than broker-dealers. We can go to whichever venue gives us the best price. We can trade with whichever counterparty gives us the best price. Based on an analysis of all our transition fixed income trading in 2008 we estimate the average saving of this competitive pricing approach is 60-70 basis points."
For Peter Walker, head of the BlackRock Solutions transition management team, the whole debate is a red herring. For him, a more important point is that the market is discovering which institutions are committed to transition management as a service and which are not. "This is not linked to the broker-dealer model or the agency model issue," he says. "It is more linked to cost pressures and we are finding out where the roots don't go deep enough."
Gary Spreadbury, head of transition management services, EMEA, argues just as convincingly for his side of the story. "If you need to buy or sell a stock, do you go to an asset manager or a custodian? No. You go to a broker-dealer because they have tools and technology to buy and sell and manage risk that others don't." Why go to an ironmonger when you want to buy a sack of potatoes? But then Edward Penings, head of State Street's EMEA portfolio solutions group, reminds us how the broker-dealer model has been damaged by recent events. "You're seeing exponential growth on the fiduciary side, while the ones who've exited are mainly from the broker-deal side."
Whatever the rights or wrongs of that argument, industry participants insist that the reduction in the number of providers will not adversely affect either the quality of service, or pricing. "The impact on pricing will be minimal," says John Mindereides, global head of transition management at JPMorgan. "We have seen an increase in commission rates, yes, but clients are willing to pay for value, and the fees remain relatively modest."Others say the same, almost convincingly enough to believe them. "The firms that are left in the business of transition management are still very aggressive and are very meaningful competitors," concludes BlackRock's Walker.