Now that’s something which is outside of the ability typically of the transition manager to look at. It’s something which in many incidences the custodian has to pick up, but often picks up well after the fact in reporting to the client. And this is an example of where the client needs to have some involvement in the decision making process up front because I’ve seen a couple of instances recently where transactions have occurred for investment reasons – and that’s all well and good, and I’m not criticising that, but the impact on an after-tax basis has been extraordinary.

Those flow from some of the buyback transactions that have gone on with managers which have had very low cost bases to those transactions. Subsequent transitions have occurred which have meant that the large imputation credit that the client would have been entitled to from the buyback, has been evaporated because a subsequent transition went on. Now those are phenomenal costs on an after-tax basis.

They don’t turn up directly in T-Charter models, they don’t turn up in many opportunity cost models, and custodians pick up the pieces to this, because they report after tax – or they might report after-tax performance or they might report tax components to the client. Now of course these things stand out but they’ll come through months after the event. Bryan Gray: That’s a good point, and it’s easier for a larger fund because you can segregate the tax aspects of activity from the trading piece.

What I mean by that is that the custodian can, from a tax perspective, make sure that the correct parcels are being applied across a portfolio while a manager is being changed, or while an investment manager is transacting, because you have the ability within the one entity to be able to tax-lot select, if you like.

Troy Rieck: It’s one of those things where, on average, large funds can spend the time and energy associated with that to decrease inefficiencies compared to smaller funds. So we all know that with the variability of performance there’s no reason why a small fund of $500 million can’t be top of the pops in the performance tables in the long run. But on average, what should the large funds be thinking about? Things where they have a strategic competitive advantage and they’re going to maintain that over time. So if it’s a multi million dollar investment to own at least some of the transition management and counterparty risk responsibility, it’s much easier for a $10 billion fund than it is for a $500 million fund to do so.  

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