Justin Balogh is senior managing director and head of transition management Asia Pacific at State Street Global Markets in Tokyo. He discusses a new report from the group about transition management.

WhatÆs the gist of your research on transition management in Asia?

One of the most prominent influences in a transitionÆs cost outcome is implicit costs such as bid/ask spreads, market impact and opportunity costs. We also found that accessing non-market liquidity sources has proven to be extremely effective in reducing the cost of a transition event.

The research analysed the various transaction-cost components of a transition, including bid-ask spreads, market impact and opportunity cost. We examined $1 trillion in assets transitioned over a five-year timeframe. The dataset included more than 3,000 transitions and approximately 1.6 million individual security transactions and gave insight into the real benefits of off-market trading and accessing alternative sources of liquidity.

You mentioned liquidity, what is happening for you in this space?

Asia, more than any other region globally, faces the challenge of liquidity. In this part of the world, liquidity is biased towards the very top tier of security issues and it drops off considerably below that. Any pension or superannuation client or asset owner who seeks to restructure broad-based mandates in this region can have a liquidity problem. Everyone understands that liquidity and transaction costs are inversely related, and in this part of the world, if a provider can demonstrate broader access to alternative liquidity pools, its ability to lower the transaction cost is greater.

What have been the main changes to asset allocation?

Recently, equity markets have performed quite strongly. WhatÆs interesting is that weÆve seen investors move out of equities in developed countries. This suggests investors are probably rebalancing their equity allocations, back to other asset classes, including emerging-market equities.

Have other Asian markets become as sophisticated users of transition management as Japan and Australia?

The standard of investment professionals is quite high and their understanding is good. ThatÆs a function of good training, but also of a higher number of qualified professionals per dollar of assets under management compared to other parts of the world. I would say that Australia is probably the most advanced in terms of general acceptance and application. Hong Kong and Singapore are relatively advanced in their use of the product and I think that Japan probably falls somewhere in between, depending on the client segment. In JapanÆs public sector, the use of transition management has really grown but for the corporate pension market, there is still some way to go before the majority of these funds use it as a solution when they are restructuring.

Will Japanese corporate pensions become bigger users?

There are a couple of structural issues in terms of how the product can be delivered. Historically, the transfer of in-kind or in-specie [securities] has not been an easy process. Japan also has a relatively higher bias to the use of co-mingled funds, and applying transition management techniques to those can be difficult. But weÆve found some solutions around this. These obstacles have kept out some potential competitors.

What about other markets?

In other Asian markets, it varies. If you look at pension systems in the emerging markets in Asia their transition activity is cash flow positive. They are funding externally, moving into asset classes outside of their domestic asset pool and predominately funding these investments with cash. That is a different scenario to an investor that is restructuring from a legacy pool of assets, as with many Japanese pension funds, and it requires a a different set of considerations.

For instance, say the pension client is handling four or five managers in global bonds or equities, and plans to fund them with cash. How the client goes about this type of one-way trade efficiently is different to how it may transition out a two-sided event, for example a from a US large cap to a US small cap target portfolio. Creating synergies and reducing transaction costs in a one way trade is an important challenge in Asia that only a few providers are structured to meet.