Working to standards
Eighteen months ago, consultants and managers Russell kick-started the process of establishing a standard for measuring portfolio performance during transitions. The result is the T Standard, which sets out the success and performance of a transition.
“From the word go, we didn’t want to say that Russell says this is the way to do it; so we worked with the main players (pension funds and providers),” says Natalie Pilcher, director of implementation services at Russell.
The T Standard is built around the part of performance reporting that is generally accepted, namely implementation shortfall. This is term initially given prominence by André Perold of the Harvard Business School, and is now widely used. The T Standard takes implementation shortfall as the difference between the return on the actual portfolio and the return on the target portfolio.
“We strongly favour the use of implementation shortfall; it is the measurement that matters most to our clients,” say Neil Walton, European partner at Mercer Investment Consulting. “Where it gets tricky is around the starting point and the end point.”
According to the T Standard, the starting point is the where the old manager loses control of the assets, and the end is where the new manager gains control of them. But within that, there are gaps, such as having to use another transition account for certain elements. During certain periods, the transition manager may be at the mercy of market movements.
If the market were to fall during the week in question, then this would be built into the performance of the transition, and the transition manager would have to explain the degree of negative result.
“Fundamentally, I don’t think transition managers want to go down that route,” says Walton. “A lot of people wouldn’t want their organisation exposed to that, and I can understand it from a commercial standpoint.” The question is whether enough people would understand the nuances of the performance result obtained if the longer time period is adopted.
In his public comment version of the T Standard, Bob Collie of Frank Russell pre-empts the reluctance to take responsibility for asset price changes that cannot be foreseen. He says the paper is driven by the perspective of the outcome experienced by the investor, “and does not set out to answer the question of the extent to which that outcome should be laid at the transition manager’s door.”
Those are important questions, he says, but cannot be addressed until the more basic issue of the performance calculation is unambiguously resolved.
Tim Wilkinson, global co-head of transition management at Citigroup, agrees that there are pieces of the performance equation under the T Standard formula which the transition manager can do little about. “But they still need to report it,” he says.