Lastly but not least in my blog series, I am delving into asset transitions. Already, no doubt, eyes are rolling… Paperwork, stress, more paperwork, risk, mooooooore paperwork. Am I right?! Well, think again…
In my first blog, I said that trustees who have appointed an Implementation Manager (“IM”) seem more confident, less susceptible to getting lost in detail, and their bandwidth is no longer swallowed by transitions, rebalancing and admin. If you’ve been reading my previous blogs, hopefully you’re already pretty convinced this can genuinely be a reality, but I reckon the value-add of IMs in asset transitions is second to none!
I’m going to break down “asset transitions” into 3 components: 1) rebalancing back to the agreed strategic asset allocation (“SAA”), 2) collateral rebalancing, and 3) implementation of new asset manager mandates.
An important reminder: I am NOT talking about fiduciary management here! I know this sounds quite fiduciary management-y, but as with the other benefits of IMs that I explained in blogs 2 and 3, the Trustee retains complete control.
Asset rebalancing back to the agreed SAA
You’re a trustee and, with the help of your investment consultant, you’ve agreed an SAA that expected to generate the right returns to reach your investment objective (buy-out by 2030?) with the least risk.
But over time, certain assets outperform and others underperform, meaning your portfolio weights shift. Perhaps you hold some equities which have outperformed corporate bonds. As a result, the equity allocation is higher than intended, which has led the portfolio risk to increase above what is strictly necessary to achieve your investment objective.
What would happen without an IM? The trustees hold a meeting (having waited for several weeks to ensure all trustees can make it) and agree a rebalancing plan with the investment consultant. The consultant then goes away and asks the asset managers to prepare instructions, which then come back to the client to sign – perhaps several days/weeks later.
How would this work with an IM? The IM, who is regularly monitoring your asset mix, notices a certain asset has strayed outside its tolerance range. He therefore immediately sells (via Power of Attorney or otherwise) some of the overweight asset and buys some of the underweight assets, and reports back to the trustees. Job done.
The trustee board has agreed to do some interest rate and inflation hedging. Great! The scheme’s LDI manager is now holding a bunch of gilts and cash as collateral to support the hedging positions. Initially, there is ample collateral, but after a significant rise in gilt yields your hedging positions have declined in value and collateral levels are starting to look low. What’s the next step?
With no IM, the LDI manager gets in touch with the investment consultant to request some more cash. The investment consultant decides which return-seeking assets should be sold and seeks the trustees’ approval. Having received this, forms are drafted and signed and the transition takes place.
Now rewind and replace “without an IM” with “with an IM”. The IM notices that collateral has fallen below a lower threshold. IM immediately sells some pre-defined liquid return-seeking assets to replenish collateral. Easy.
(Note that schemes with an IM can afford to hold less same-day cash as collateral as the process of replenishing this is much quicker. This can mean significantly less portfolio cash drag.)
Implementation of new asset manager mandates
Your trustee board has decided to appoint a new asset manager to manage, let’s say, a multi-class credit mandate…
No IM: the trustee secretary / in-house team fills in a bunch of account opening docs, the scheme lawyers review a bunch of docs, a lot of people worry about transition management and the transition is probably completed 4-6 months later.
With IM: IM drafts, reviews and submits all paperwork, liaising with the investment consultant and incumbent asset managers as appropriate. The trustees sign a single instruction. Done and dusted.
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