How interim asset management can help.
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:
Leave the mandate with the existing manager (where able)
- Least amount of work/administrative ease.
- Concerns over governance of your organisation’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.
Terminate the mandate and require care and maintenance
- 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.
- 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.
Restructure to a passive mandate
- Administrative ease.
- 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 minimises costs and risk, but are 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 minimising the performance impact of the portfolio restructure and maintaining the desired investment exposure. This includes employing strategies, such as derivatives, that minimise 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 organisation 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
Optimised beta exposure and a reduction in trading and transaction costs by consolidating multiple transitions.
Maximise in-kind transfers with each transition.
Increased flexibility, nimbleness and the ability to efficiently leave the legacy manager.
Ability to utilise existing securities to fund new manager once chosen.
Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.
The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.
Examples of how we have helped
Your portfolio deserves specialist oversight and management at all times - especially during times of change. We have the experience and deep capability set to help you manage your exposures and navigate the challenging road ahead. Let us know how we can help.
Thinking of making a change?
Read the recently published Transition Management Guide 2023 from Global Investor Group.
We took part in their annual roundtable of global transition managers (page 26) to discuss the key trends and challenges from across the industry and how we are helping clients to address them.
Customised Portfolio Solutions
Specialist expertise and strategies to help your team gain greater portfolio control, limit costs, reduce risk, and enhance returns.
Managing assets in transition to minimise unnecessary costs and mitigate unrewarded risk.
Manage foreign exchange (FX) trading costs and currency risk by drawing upon our currency investment team and FX trading specialists.
Execution solutions to achieve enhanced returns using the latest advances in technology to find liquidity, reduce transaction costs and manage risk.
An essential tool for managing large pools of capital as derivative overlays help manage risk elements and improve performance.
Improve control of exposures and risk-adjusted returns and reduce the cost of production while keeping your investments precisely aligned to your beliefs without sacrificing the power of a multi-manager approach.
* Asterisks indicate required fields.