Transitioning back to normal
Institutional investment managers are looking to resume asset transitions in record numbers.
Mark Keleher, CEO of the Bank of New York (BNY) Mellon Asset Management's transition manager Mellon Transition Management (MTM), thinks institutional investors are on the verge of an unprecedented level of asset manager replacements.
According to Keleher, investors have increased their exposure to indexing and longer-duration bond strategies and scaled back on the number of firms actively managing their assets.
His assessment is based on the 40% increase in pre-trade inquiries MTM received in the first five months of the year and the increase in executed transitions from the first to second quarter. The exact increase was not available.
The decision to resume transitions signals a return to normalcy for transition managers. After last year's credit crunch, a number of managers exited the market because of decreased business and high infrastructure and operating costs. Those who remain have gained market share but have been operating in a down market.
"Now that the volatility of the last eight to 12 months has died down, asset owners want to rebalance and return to their asset allocations," says Kal Bassily, managing director and head of global transition management at New York-based agency brokerage BNY ConvergEx Group.
The Vix index of implied volatility, a measure of the implied volatility of S&P500 options, closed at 25.93 on Friday, down from a high last fall of 89.53 but higher than the accepted market norm of 18.
"Institutional investors are saying 'yes, volatility is higher but it's ok to do more transitions'," says Bassily.
In Asia, Bassily expects two trends to emerge in transition management over the next six-months: large institutional investors liquidating their portfolios and resuming their suspended international equity diversification plans. By large institutional investors, he refers to the region's sovereign wealth funds, large public pension funds and large financial institutions.
"Asian institutional investors had significant exposure to asset-backed securities," he says. "They've been hit by depreciation in their portfolios and wanted to liquidate but the markets have not been conducive."
Until now investors faced significant capital losses if they liquidated. Traditionally, principal dealers handling liquidations would sell the assets all at once and charge a fee of 100bps to 200bps (1% to 2%) on the value of the transaction.
Echoing Keleher's prediction, Bassily says Asian institutions will increasingly use transition managers for their higher liquidation values and lower fees. A manager liquidates a portfolio over the course of four to six weeks, seeking the best value for each asset versus selling it all at once at the current market value. The fee is approximately 5bps to 15bps per transaction.
Additionally, Asian investors have been shifting their asset allocations to international equities from local government debt and domestic equities for the last two to three years. These programmes were largely halted during last fall's economic carnage.
"The freeze in diversification programmes is being taken off now by Asian investors," says Bassily. He explains that before the freeze these programmes represented a significant portion of transition management revenues in the region and a resumption will bring a return of fee streams.
Rising revenues will lead to growth in the transition management business. MTM added seven people to its London team this spring while Citi, Credit Suisse, RBS and UBS restructured, downsized or eliminated their transition management businesses in Europe.
In Asia, Morgan Stanley hired its first regional head of transition management this February. Other managers have anecdotally stated that the business remains core to their Asia-Pacific operations.
BNY Mellon has $19.5 trillion in assets under custody and administration, $881 billion in assets under management, services more than $11 trillion in outstanding debt and processes global payments averaging $1.8 trillion.