The complexity of transitions has certainly gone up. A lot of these things are multi manager, multi asset class, including a few of those ‘we’ve got no idea about these stocks and exposures, and what can you do to help us?’ type of trades. As well as the volatility meaning your dispersion of outcomes is going to be wider. We need to come to terms with that, because one of the big hidden costs in transition management is excessive delays. If you’ve made a decision that you’re going to significantly downweight or cut a manager, pandering to him for three months about it, torturing yourself about ‘will conditions get better and transition costs come down?’, what’s the likelihood that that sort of delay’s going to pay off for you?

Almost certainly Murphy’s Law applies and it will get much worse, mostly because people cut managers that are underperforming. It’s very rare to cut an outperforming manager, which means it’s most likely that those sort of stocks and exposures are under pressure and selling into a falling market. If you replace him with a manager who has recently outperformed, you should always expect to be paying a cost. Wider dispersion means that sometimes those realised costs are going to be larger.

Where funds sometimes really have to make the leap between the two, it’s the risks of delay that can also be annoying. Jim Karelas: Troy makes a valid point – especially in volatile times, the opportunity costs associated with moving from a particular investment strategy is actually amplified. So finding that balance between your market impact and opportunity cost is paramount. That’s where the services of a transition manager become paramount, especially given the fact that the key risks are market exposure costs.

So basically you’re looking at the tracking error between the legacy and the target portfolio, and that can be quite substantial, especially if there’s going to be a change in style between two portfolios. So moving with speed is actually very important, especially during volatile times. The sad fact is, the cost is going to be greater during these times. Michael Bailey: So I’m assuming you’re making that pretty clear up front to clients? Jim Karelas: Correct. But by the same token, most superannuation clients are strategic asset allocators. So their investment strategy is not to try and time the markets, but just to implement efficiently and as quickly as possible.

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