Decisions relating to restructuring portfolios usually involve changing the portfolio composition to meet new asset allocation criteria, chosen index benchmarks, or new fund manager selection.

It is a time when custodians can play a very useful role.

Three clear objectives help in assessing and managing the true costs of portfolio liquidation. First, maximising sales proceeds by ensuring efficient execution of liquidations. Secondly, minimising transaction costs, by optimising liquidation techniques to reduce costs associated with bid/offer spreads, market commissions and market im-pact. Thirdly, maintaining market exposure, by managing the portfolio exposure to market indices during the liquidation or during longer transitions between managers.

Traditionally most liquidations have been performed as a service" by the incoming fund manager. On some oc-casions liquidation is left to the old manager. But more pension funds are looking to independent third parties to act as agent during a transition .

Besides the fiduciary arguments for employing a dedicated agent to perform this service, there are a number of other advantages:

Primary focus: Where the incoming or outgoing manager is executing the liquidation, this is not usually a primary focus of their business. By employing a third party, a pension fund ensures they have a dedicated agent focused on servicing one transaction on their behalf.

Independence: Many fund managers offer liquidations services "free" to clients as they are able to use the liquidation to feed broking subsidiaries or tied relationships. A third party liquidator will make full use of competitive broking bids and commission rates. As fees for liquidations are based on market value of the portfolio involved, they are incentivised to maximise sales and minimise transaction costs.

Speed of execution: Given their primary focus to provide an efficient liquidation service, independent liquidators are motivated by issues of efficient trade execution and so on. They have no need to drop a portfolio to cash as quickly as possible and have no performance issues with maintaining a portfolio on the books during a transition. They will spend time planning the most efficient trade execution schedule to maximise proceeds consistent with a client's timetable and objectives.

Daniel Sharp is with Northern Trust Company in London"

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