Executive summary:
- The reasons for transitioning are often regionally specific and unique to the individual portfolio.
- Rather than focusing on single-asset transitions, we have seen North American investors restructuring at the total-portfolio level.
- Investors are positioning themselves to capitalize on Japan's growth potential.
- In EMEA, there are some instances where regulatory factors are driving portfolio transitions.
- Transition management may be episodic, but with the complexity of current investment strategies, the need for a trusted partner has never been more important.
The U.S. has a familiar face due to enter the White House, and, as with any change, potentially higher levels of market volatility. Now more than ever investors are evaluating whether their portfolios are appropriately positioned for change.
This has been reflected in the flurry of activity and demand we have seen for transition managers. This year at Russell Investments, in EMEA alone, we have seen more activity in the first three quarters than at any point since 2020.
However, while it could be easy to attribute portfolio changes to the broad political and macro-economic environment, with clients positioning themselves accordingly, the reality is that change is unique to the individual portfolio. For one investment program, U.S. Federal Reserve (Fed) rate cuts might impact their tactical decision-making, while for others it could be longer-term factors that dominate.
In this article, we attempt to highlight the regional trends that we believe are driving transition events across the globe and how this might be impacting the selection of transition managers.
North America: Bigger and more complex
We have observed in North America a trend toward more total portfolio management. Rather than focusing on single-asset transitions, we have seen North American investors restructuring at the total-portfolio level. The result is that we have seen fewer, but larger events.
Certainly, the number of events we have seen in 2024 has been helped by clarity on the Fed's strategy going forward, but we have also seen more tactical timing. For instance, some clients were eager to implement their changes ahead of the U.S. election due to concerns around potential volatility. Having a large, dedicated transition team with multi-asset expertise and regional client coverage, means that we have been well-placed to service clients' requirements, especially when needed in short notice.
Asia: Opportunism
In Asia, we are seeing another distinct set of drivers. These includes sector rotations, particularly in global technology, where clients reflect differing views on their long-term potential. Alongside these sector adjustments, there's been a focus on country exposures. For example, we have seen a marked tactical reallocation from the U.S. and European markets into Japan. With Japan's stock market performing strongly, investors are positioning themselves to capitalize on the country's growth potential, intensifying transition management demand in the region.
Looking forward, it is worth considering whether such trends could be reversed with a new Trump administration at the helm. Having a transition team in the region ready to respond quickly to clients when implementing and potentially reversing such tactical portfolio shifts, is essential.
Europe: Regulatory impacts
In Europe, there are some instances where regulatory factors are driving a number of portfolio transitions. In the Netherlands, the introduction of the new Pension Contract has continued to drive change and prompt many pension funds to re-evaluate their portfolio structures. Additionally, Environmental, Social, and Governance (ESG) considerations are taking center stage, with some large Dutch providers integrating sustainability more thoroughly into their investment processes. This trend includes both top-down exclusions and bottom-up, proactive ESG integration, with each driving significant changes to portfolio compositions.
By contrast, in France, the timing of mandates also plays a unique role. Many investment mandates in the region are awarded for fixed terms, often of three to five years, meaning that portfolio restructurings are frequently timed to coincide with these renewal periods. Therefore, the timing of transition events is more driven by the timing around new mandates being awarded, than any macro-economic factors.
The importance of trust
Across all these regions, while market conditions and investor needs are evolving, one constant remains: the importance of trust and expertise in the transition manager-client relationship. As transitions grow in size and complexity, clients are increasingly relying on transition providers that can not only execute their strategies efficiently, but also safeguard their interests, minimize costs, and protect portfolio confidentiality by minimizing information leakage. Furthermore, it is essential that a provider understands the unique regional situation of each client and provides a tailored approach.
Russell Investments, with our fiduciary approach and comprehensive global transition management capabilities, are a trusted partner that clients have and will continue to depend on for both large-scale restructurings and tailored transition services. Transition management may be episodic, but with the complexity of current investment strategies, the need for a trusted transition management partner has never been more important.