Interim Asset Management

A cost- and risk-minimizing solution for restructuring assets

Compared to traditional approaches, interim asset management promises ease of use and significant cost savings.

Some common reasons for making an investment manager change include portfolio manager lift-outs, investment manager closure of the business or winding down a specific strategy, scandals or improper conduct and underperformance. In these scenarios, there is typically a desire to make a change quickly, but investors can be faced with options that are not ideal and can leave assets in limbo while a new manager is vetted and selected. Often this manager search and selection process can take months to complete.

 

There is a better way to manage your exposure when switching investment managers


Once the decision has been made to terminate an existing manager or mandate, institutional investors are then faced with what to do with the assets until a new manager is selected and under contract. We believe there is an ideal way to handle this situation, but let’s first review some of the more common, but less than ideal solutions to this challenge.

  1. Leave the mandate with the existing manager (where able)
  2. Terminate the mandate and require care and maintenance
  3. Restructure the mandate to a passive mandate

Each of these options has a number of disadvantages, which tend to outweigh any potential advantages:

LEAVE THE MANDATE WITH THE EXISTING MANAGER (WHERE ABLE)

Advantages

  • Least amount of work/administrative ease.

Disadvantages

  • Concerns over governance of your organization's assets. If you're holding on to a manager whose confidence has been lost, are you really doing your fiduciary duty?

  • Continuing to pay for active management fees when the active manager's insights are no longer desired.

  • A junior portfolio manager could potentially take charge of your portfolio. This often arises in instances where the old manager has been lifted out. You may be left with a manager you've potentially never researched.

Terminate the mandate and require care and maintenance

Advantages

  • Administrative ease.

  • Compared to the do-nothing approach, perhaps governance is at least improved under this approach, as no new active decisions are being made by the manager in which confidence has been lost.

Disadvantages

  • Still sitting on active bets taken by the manager that will become stale over time.

  • No real active oversight over the portfolio, let along accountability for it.

  • Continuing to pay active management fees.

Restructure to a passive mandate

Advantages

  • Administrative ease.

Disadvantages

  • Transitioning from active to passive management, and then back to active, can be very costly due to the transaction fees incurred from buying and selling assets at both stages.

  • You've been paying active management fees to achieve specific alpha targets or investment exposures. Transitioning away from an actively managed portfolio could increase the risk of not meeting your investment objectives.

The costs of these simplistic approaches are significant


The one consistent advantage seen in all three is the ease-of-use factor – that is, the lack of an administrative burden.

What if there was a solution that could satisfy both of these needs and relieve the administrative burden while still saving on cost? We believe the solution to this exists in a fourth option – interim asset management.

The better option: Interim Asset Management

Interim asset management is an investment management solution provided by some interim managers, like Russell Investments, as they have specialist teams who are not only ideally placed to "transition" the assets being restructured in a manner that helps minimize costs and risk but is also held accountable for the performance of the portfolio during the interim period between the departure of the old manager and the onboarding of the new manager. During this timeframe, the assets are held in an implementation account set up by the interim manager.

Meanwhile, the interim manager is responsible for minimizing the performance impact of the portfolio restructure and maintaining the desired investment exposure. This includes employing strategies, such as derivatives, that potentially minimize unnecessary trading costs for the asset owner, in addition to mitigating unrewarded risks. This eliminates so-called performance holidays, ensuring there are no gaps in overall performance.

Just as important, the workload is transferred from the asset owner to the interim manager, preventing vital resources in the organization from becoming overly burdened by non-core administrative tasks. As a result, the asset owner often receives active management with reduced risk without paying the active management fees.

Advantages of Interim Asset Management


What if there was a solution that could satisfy both of these needs and relieve the administrative burden while still saving on cost? We believe the solution to this exists in a fourth option – interim asset management.

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Costs

By consolidating multiple transactions, you can optimize exposure and reduce trading and transaction costs.

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In-kind transfers

Maximize in-kind transfers with each transition.

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Flexibility

Increased flexibility, nimbleness, and the ability to efficiently leave the legacy manager.

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Utilize securities

Ability to utilize existing securities to fund new manager once once chosen.

Building an optimized representation of the MSCI ACWI

Our client, wanting to get out of a global mandate, initially tasked us with building a full representation of the MSCI All Country World Index.

Our team analyzed the client’s portfolio and built an optimized portfolio of individual securities and a few ETFs, tracking the index within 35 basis points (bps) of annualized tracking error. We were able to retain a significant amount of the legacy portfolio by only purchasing approximately 1,200 names in the index – leading to dramatic savings in trading costs and custody fees.

After the initial optimization, the client used this as an implementation account for the next six years. The account fluctuated between $200 million and $5 billion in value, depending upon what the client was doing, with the client transitioning in and out of the implementation account eight to ten times per year.

Transition from AJO

AJO Partners announced it would close its doors at the end of 2020, meaning clients would need to move their assets to another investment manager.

Ultimately, seven clients hired us to take over their AJO portfolios, trim the tracking error risk from around 4% of the benchmark to 1.5% to 2% of the benchmark, and then manage the assets on an interim basis until the clients could find a long-term solution with another investment manager.

The clients chose to go with a 1.75% tracking error to the benchmark (with an estimated cost of 12.5 bps, +/-14.2 bps), which saved them an estimated 34 bps in transaction costs versus going all the way to the index. We were able to achieve these results with only a 15% turnover in the portfolio, while still maintaining their desired investment exposure.

Pension plan with EM Debt Manager

In early 2020, a public pension plan approached us because they wanted to terminate an emerging market debt manager but had not yet contracted a new manager.

We helped evaluate a few options to provide various risk and cost scenarios. This analysis also factored in various turnover scenarios, ranging from 5% turnover to 20% turnover - and the risks and cost impacts associated with each scenario. Ultimately, we reduced the tracking error by approximately 40% by turning over just 5% of the portfolio, while preserving the desired investment exposure.

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