Managing Exposures | Russell Investments

Compared to traditional approaches, interim asset management promises both 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.

Is there 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.

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

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

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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 in which 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.

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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 alone accountability for it.
Continuing to pay active management fees.

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Restructure to a passive mandate

Advantages

Administrative ease.

Disadvantages

It’s very costly to transition from active to passive, then back from passive to active, as you end up paying transaction costs for selling and buying assets on both ends.
You were already paying active management fees to meet a particular alpha target or investment exposure. Moving away from an actively managed portfolio may increase the chances you won’t meet 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.