Football & Portfolio Implementation – ensuring a perfect line-up

August 5, 2014 Categories: Investment Strategy

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In the last post (Setting a Winning Strategy) I related the importance of strategy implementation in football to multi-asset portfolio management.

Central to maintaining the strategy was a strong team captain, or implementation portfolio manager, who played a central role and pulled the strings with the flow of the game in order to ensure that the strategy remains in place and any tactical changes are altered in real-time.

Whether it was the hot weather in Brazil or the immensely deep squads that teams have these days, subs scored an above average amount of goals in the 2014 World Cup. So today, let’s look at what happens when investors find their “super sub” and want to make changes to their line-up.

Similar to footballers, some investment managers are better suited to certain situations than others and getting the combination right and making meaningful substitutions is very important to achieving the overall strategy. However, if you let in a goal while making a substitution, or, in investment terms, lose 1-2% of the portfolio value by being out of the market or overexposed for prolonged periods while making a change to the portfolio, then all of the hard work that went into developing your strategy can be rendered useless.

When implementing changes in portfolios, costs can be minimised and the risks of changing investment managers can be reduced by using a transition manager. Transition managers are specialist asset managers that focus solely on moving assets from one fund manager to another in the most cost-efficient manner possible. Common uses for a transition manager are changes to the manager mix, asset allocation changes, asset redemptions, investment of contributions, or pension fund mergers. Transition managers are accountable for investment performance during the transition period and should be incentivised to reduce unnecessary costs and mitigate unrewarded risks associated with changes to investment exposures. The costs of transitioning assets are typically reduced by retaining in-kind securities (i.e. assets held by the old manager that the new manager may want) and by devising an appropriate trading strategy that minimises the impact of changes to different portfolio characteristics.

In addition to trading and project management expertise, one of the greatest benefits of using a transition manager is the transparency into the costs of making changes. When incoming fund managers are allowed to trade their own portfolios, they typically ask for a performance holiday and are not held accountable for the cost of buying the assets. Similarly, when managers are fired, they have no incentive to trade in a manner that is in line with the client’s best interests. Transition managers perform full pre-trade and post-trade analyses that should provide a transparent breakdown of explicit (brokerage commissions, management fees, custody fees, taxes, etc) and implicit (spread, market impact, and opportunity) costs. These analyses and transparent cost breakdowns can be used to identify the total cost of portfolio changes.

Obviously, transition management plays an important role in a multi-asset portfolio. Understanding different transition manager models has also become increasingly critical when it comes to selection. Because of this, the UK’s National Association of Pension Funds (NAPF) has issued a “Transition management made simple” guide which walks through many of the above points in greater detail. That document can be accessed here: Transition Management Made Simple.

In my next blog, I will look at how investors can ensure that dishonest market participants are not taking advantage of them. Investors can be sure of transparency if they choose to execute trades through a well-aligned agency trading partner.

Yacine Zerizef – Portfolio Manager, Implementation Services, EMEA

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