March seems to be the month
where super funds are expected to resume hiring and firing their funds managers
and other service providers in earnest. What are the warning signals that
should lead to those decisions being made? And how to best proceed with any
transition when market volatility is around record highs? Last month,
Investment & Technology and J.P Morgan brought together a group of
operations specialists from the superannuation and multimanager worlds, as well
as consultants and an exchange-traded fund expert, to discuss the best advice
they would give to their trustee colleagues. Participants in the roundtable were as follows:
• Marian Azer, principal, Mercer Sentinel • Michael Bailey, editor, Investment & Technology magazine • Rose Challita, program manager, IAG Asset Management • Bryan Gray, head of sales and relationship management, J.P Morgan Worldwide
Securities Services • Fenella Gray, investment operations manager, NZ Accident Compensation
Corporation • Jim Karelas, vice president of transition management, J.P
Morgan • Troy Rieck, managing director of capital markets,
Queensland Investment Corporation • Adam Seccombe, head of
business development, Barclays Global Investors • Drew Vaughan, principal, Dymond Foulds & Vaughan Michael Bailey: Today we’re hoping to have a good
discussion on assessing counterparty risk and how that translates into a
transition management decision, particularly in a time of great uncertainty as
we’re experiencing in investment markets.
Hopefully today we’ll emerge with some
useful advice for I&T readers who are trying to assess risks among their counterparties,
including their funds managers. And of course, hopefully some tips for those on
the other side of the fence who are being assessed. The uncertainty I mentioned
certainly has reduced the volume of transition management business of late. A
lot of funds we speak to seem to be a little bit reticent to do all that much at
the moment. Probably your $10 billion-plus funds are doing bits and pieces,
just because they’ve got the cash flow coming through.
I thought we’d kick off
today by asking Jim Karelas, vice president of transition management for J.P.
Morgan, based in
to share his observations on what sorts of transition activity he’s being seeing.
Jim, since the ‘GFC’ took off in earnest around last September, what’s been
motivating those transitions? What do you see as triggers for the assessment of
counterparty risk in future, and what sorts of transitions might that produce
in future? Jim Karelas: The overriding theme of any portfolio
restructure is for alpha generation and risk minimisation.
Lately what we have
been seeing is a few trends. Clients have been requiring liquidity due to cash
redemptions, and hence liquidations of portfolios have been on the agenda.
Additionally some clients have been looking at moving back to passive mandates.
They’re not satisfied with the active mandates that they have employed over the
last five years, and as such a cost reduction mechanism has been put in place,
hence the move back into more index-like mandates. In terms of other
motivations, clients have typically, over the last year, been putting many of
their new contributions into cash pools.
Those cash buffers are now being
slightly breached and clients will have to start investing that cash and
getting the appropriate exposure, as per their PDS and mandate requirements. Michael Bailey: In terms of the funds and multimanager
representatives we have here today, I would be interested to hear how the way
you look at counterparty risk has changed in recent times. Fenella Gray: I think it’s a bit different for us because we now manage most of
ours inhouse, and we actively manage our external managers.
We have five external
managers which are formally reviewed every 12 months anyway, and every month
they have to provide us with stuff. So our risk has been more looking at the
smaller counterparty risk rather than actually at our fund managers – banks;
exposure to brokers. You know, people aren’t settling trades – before you might
have thought, ‘ah well, we’ll do that tomorrow’, now you’re definitely looking
into it that day. Michael Bailey: What about you, Rose? Rose Challita: We have
several external fund managers, and we have regular meetings with them and updates
But once again, we’re looking at their exposure to the counterparties
– we have a lot of long/ short funds, market neutral et cetera, so we’re
looking at their exposure to their prime brokers. We have also revisited, with
our consultant Mercer, how we approach our reviews with our external funds
managers. We’re looking at any significant mandate losses, because that threatens
their funds under management and operations spend. We’re looking at their
investment style, their key man risk. Michael Bailey: Is that FUM risk an issue you’re seeing,
Troy? Funds managers live
and die by asset-based fees, which were was great for a long time, but is there
more of a concern when revenues are slashed 50 per cent?
Troy Rieck: I think the hidden aspect of counterparty risk in its broadest sense
is that you need viable service providers. They may be an external funds
manager. They’re a futures broker. They’re a counterparty. They’re a custodian,
clearer, et cetera. You need viable service providers. So the extent to which they’re
fee-based and their profitability is highly leveraged to equity returns, is an
issue to deal with. We’ve received a growing level of enquires over the last three
months from our clients about the extent to which they may have contingent exposures
through their futures clearer or their custodian; how these guys are going to
survive if equities don’t materially rally from here, or they lose 20 per cent
of their client base. The plain vanilla aspect of a counterparty risk is
something we’ve always been a bit obsessed about.
We’ve moved in the last 12
months though to centralise that as far as possible. So within our largest
mandates, we’ve previously had a model where the individual business units
would take care of their counterparty risks. And clearly that can lead to some
systemic issues at the fund level if you’re not careful about managing that
stuff. So we’ve moved to centralise all that. We’ve pushed all our
counterparties down the road into credit support annexes. As far as practical,
we want to crush that residual counterparty risk out of the fund.
are the way to go when you want flexibility or specialist exposures, when you
want some risk appetite on the other side of the table to get the work done,
but you need to remove that residual risk otherwise you wake up one day and
$250 million doesn’t come in the door, and everybody’s finished. It’s just
freeing up our investment decision-makers to do their job. They’ve got enough
to think about when the world’s coming to an end without having to worry about ‘well
I can do this deal but is the counterparty going to be here in three years?’ Michael Bailey: Just from the back office perspective, what
are some of the tools that you’re seeing come through that are maybe generating
more demand at the moment for helping people assess counterparty risk?
you getting requests for? Drew
Vaughan: The focus on counterparty
risk today is so much greater than it was six months ago. And a consequence of
that is that the tools are catching up with the focus, so at this stage it is a
lot of work to examine the levels of counterparty risk that exist through the
fund. And probably it’s a different skill set that has existed in that sense.
That sort of activity often sat with the front office guys, and wasn’t absolutely
their direct area of interest or focus. Now there’s a recognition that maybe
that’s not the right place for it to be. It’ll probably be drifting into
operations and back office areas, and external providers to give them some
And this will be a manual analysis, there’s no tool today that
brings it together as directly as that. Marian Azer: It’s
layered. I’ll give you an example, particularly in the multimanager space, we
do investment operational reviews, and that covers people, processes, systems.
It covers disaster recovery programs. And it also includes counterparty risk.
For example, looking at a multimanager’s funds managers and saying, who’s on
the broker panel? How have you assessed their risk, and what is your exposure? How
much have you put through them? The transition managers panel too. So it’s very
layered. If you can imagine a multimanager, it could have 20 or 30 managers and
then those managers have their own set of risks. We’re finding a lot more
clients are not only now interested in the front office capability, the alpha generation.
They’re interested in the risks associated with the back office and the
decisions made there.
So I get my multimanagers to actually go in and assess each
of their clients. And it is a very manual process, and you are relying on a lot
of expertise. But it’s catching up and people are just recognising that, gee,
not only do I have the risk of having these fund managers managing my money, I
have the risk of the entities they’ve contracted with as well. And I need to understand
that. Michael Bailey: It seems such a hard thing to get to the bottom of. Part of
what’s prolonging the crisis is that everyone’s paranoid, there are all these credit
default swaps sitting out there and nobody knows exactly who’s liable.
of doing a manual assessment, how confident can you ever be? Drew Vaughan: I think that’s part of the manual process. Clients are starting by
asking their custodian to sit down and give them a list of counterparty transactions
and the structures in the portfolio. I looked at a client recently, not a particularly
large fund, about $3 billion. The COO asked his custodian to go through and
assemble a list of counterparties.
The interesting thing out of this was that
when you assessed the counterparties for the forward foreign exchange contracts
they had, they had a phenomenal exposure to an individual counterparty through
those that wasn’t really anticipated. That sort of is going to come to light
and people will do it by manual examination; by asking the custodian; by
sitting down and thinking about it more. So the focus is really there, and it’s
a good thing. Bryan Gray: Access to data is really the key isn’t it,
Drew? If funds can get their hands on the data, it doesn’t have to be real time
– though as close to real time as they can get it – at least you’ve got information
to make decisions, and then you can take action.
But until funds get their data
structures under control and understand what risks are sitting in there,
ignorance isn’t bliss. The stuff they don’t know is what can hurt you. Drew Vaughan: I think there’s an expectation at some smaller funds that the
custodian settles the trades and the problem goes away. And that’s not actually
the case. Bryan Gray: The interesting thing is, you’re right, the
custodians are asked to gather this information. But at the same time I think
the clients are benefiting from the vigilance that the custodians are taking of
their own accord.
In terms of counterparty settlements for instance. When the
Lehman issue was going through, we had automatically implemented a process of
checking every single transaction that was going out. So the manual element of
it – where generally we prefer things to go straight through, in those cases we
were kicking them out on purpose to make sure we were comfortable with any
payments that we were releasing. Michael Bailey: Let’s try and get a sense of how the
counterparty risk assessment translates then into a transition decision.
are the warning signals trustees should look for in an underlying service
provider? Fenella Gray: Key things for us are staff changes. Key people
leaving an organisation creates an alert to start with, because quite often the
way we appoint is actually around people, as well as their fund performance.
And also consistent performance. So if we’re noticing a trend of inconsistent
performance against benchmark, what we’ll do is go line by line through the
stocks, and look at what they’re trading, what they’re doing, because we’ve got
our own investment professionals in-house.
So we’ve got the ability to do that.
And that’s one of the big key things for us, which is what we actually did with
one of ours recently, and we really couldn’t understand why they would be
holding the stocks they were holding which were the poor performers. So we
decided we didn’t like the way they were managing. We talked to them and they
believed what they were risking was right and we really didn’t. So all the
signs were there and it was time to move. Rose Challita: From an
operational perspective, we engage Mercer to help us build a profile for when
we select external fund managers.
And we’ve gone a step further. We’ve actually
said to them, if your own counterparties don’t, for example, go with our
custodian, then we’re not going to even look at you because we want to
centralise our counterparties. Whereas before we didn’t have that restriction. Troy Rieck: Picking up on consistency of manager performance with expectations.
The world has gone quite crazy in the last six months. Some of our manages have
produced, on a naive basis, a surprising performance.
But when you do a market
environment analysis and understand what the hell has actually happened in the
last six months, it’s consistent with their process and the expectations,
conditional on the market environment. That’s the important part for us. It’s
all in context. If we saw these sorts of performance numbers in a nice calm
environment, we’d be tearing our hair out. We’re very keen for our managers to
talk to us about unintended exposures to markets. The credit managers. Do you really
know what you’re doing in terms of your credit spreads? Can you get in and out
of positions with the credit market being so low relative to historical norms?
And so conditionality on current environment makes it a much easier job to
think about what’s normal and what’s an abnormal performance.
Rose Challita: We’re finding our clients are not just interested in front office
any more. They’re very interested in your back office. They’re interested in who
the fund manager is. They’re very interested in the key people in the back office
and drilling into the middle and back office processes as well. They’ve discovered
that as an extension of their own risk. Drew Vaughan: An
extension of the counterparty risk discussion is about the change that’s going
on in ownership of organisations, because we’re seeing a lot of funds managers
being sold off as part of a capital reconstruction arrangement that might exist
with the parent company in a different location, outside of here.
represents a new risk for funds because the entity they thought they were
dealing with as a funds manager in that capacity could suddenly have its
ownership changed, and all sorts of things could flow out of that over time. Michael Bailey: But is the confidence there to make a
transition at the moment? Troy
Rieck:. I think a lot of funds have
been standing still in the last six months. They’re far too busy worrying about
other things to think about, do I turn over my 12 Australian equity managers.
But I think they’re now getting used to the fact that the crisis is not going
away and volatility is here to stay for a long time. And that transition business
is ready to come back to the market. And we’ll also see the asset consultants,
having done their half year reporting, will go round to the trustee boards for
their January and early February meetings. So transitions will pick up, but we’ve
seen a change in the industry as well. The risk appetite on behalf of
investment banks and transition managers is much lower on an industry aggregate
basis than it was 12 to 18 months ago.
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.
If they’re looking for that new alpha
generator, it’s probably best to implement that as quickly as possible. Like
Troy said, stop wringing
their hands and trying to find out what the market’s going to do in the next
six months. Marian Azer: Delay causes information leakage too. The
market’s not perfect, so by the time they actually do make the transaction,
half the market knows, you know, that they’re about to do it. Particularly if
it’s large, it’s very obvious, and particularly with the Australian market, the
ASX, it’s not that big. So it’s very difficult to disguise a large trade.
Troy Rieck: It’s a very gossipy industry. Transitions tend to run in phases.
When the manager gets deeply out of favour, everyone lines up. Marian Azer: Yeah. You recognise that particular manager’s stock. It’s something
that can’t be helped. It’s a symptom of our market size. So I agree that, if
you are about to make a decision and you’re going to have a transition, then do
it as quickly as possible.
Having said that too, I think a lot of what we’ve
been seeing is fund trans fers. So actual super funds and mergers happening,
particularly the third and fourth quarter of last year, and that was
particularly difficult because it was moving the whole fund rather than a single
asset class across. And we found transition managers were in demand then,
particularly those with more of a project management approach. Jim Karelas: The changes that have come through in the tax concessions for successor
funds might mean that some of the funds that have been holding off from doing
mergers in the past start saying, ‘now might be the time’.
So I think there’s a
good chance that we’re going to start to see some further activity. Michael Bailey: Adam, I’m interested to know to what extent
exchangetraded funds (ETFs) are being used in institutional transitions and
rebalancings. Adam Seccombe: The very noticeable levels of growth in ETF
usage last year especially, really are driven by all of the topics that have
been discussed this morning. The absence of counterparty risk within an
instrument that offers index exposure and deep liquidity, and transparency.
a world in which the big managers are focused on asset allocation, these products
which give transparent, low cost index exposure and that can be transitioned
very cheaply, clearly have a long way to run. I’m interested by comments that
transitions face problems whereby the footprint of a particular manager can be
recognised. One of the things we’ve seen in the States is that actually before
transitions, particular investment styles are encouraged to collapse the
portfolio into an ETF as part of a creation unit.
So just the ETF is
transitioned as a single security. It reduces cost. It reduces implementation short
fall. And it’s those sorts of uses of ETF that have driven the turnover. Marian Azer: They’re particularly good when you’re looking for a specific asset
small cap or emerging markets, and you’re trying to replicate a benchmark. It’s
difficult to get futures to replicate those sort of benchmarks.
Adam Seccombe: There are obviously a number of ETFs on benchmarks similar to
futures, and where that’s the case a manager should look at the ETFs as well
as, rather than instead of, futures because there will be subtle differences
between the pricing of a future and an ETF. We run S&P500 money and we own
ETFs and futures because if we want to buy, we obviously want to buy whichever
is cheaper, and if we want to sell we want to sell whichever is more expensive.
Bailey: For the institutions that
are here, have ETFs proved useful as a transition tool?
Troy Rieck: We want every tool at our disposal we can get. I’ll pick up the point
on the derivative pricing. In the current world where everyone’s short of cash,
people have forced sales of equities because they can’t sell their fixed interest
portfolios, and we’re tending to find that derivatives are trading expensive to
fair value. So if you’ve got money to put to work, you prefer not to buy the
derivatives, all else being equal. Jim Karelas: But if
you want to take money off the table, you’ve got the choice because you sell
the derivative at a premium.
Rieck: But you can turn that around.
There’s still ways you can use those ETFs. We’ve actually done a couple of
structures recently where we’ve got a swap on the ETF which has been
considerably cheaper than either an index portfolio or a plain vanilla
derivative. By being able to put risk capital out there, you can facilitate
other business and the counterparties are happy to share some of the rewards
that come with that. So you use every tool at your disposal in times like
these. But the rebalancing one is one I find very interesting.
Funds, I don’t
think, have any idea how much additional risk they leave on the table when they
don’t take care and maintenance of their portfolios seriously. People often
talk about, ‘I haven’t rebalanced in the last three months and equities have
gone down a lot and that’s really great’, but let’s hope you get the timing
right when you want to get back in, because you’ve not got your biggest
exposure at the worst possible time if markets rally.
And what we’ve tended to
find over history – and research seems to confirm it – is that if you don’t pay
attention to that care and maintenance on a very frequent basis, you leave
really big risk on the table, and in the long run you tend to leave a lot of money
on the table as well, because you missed that high volatility. Michael Bailey: It’s interesting because quite a few funds,
including some of
largest, have been quite proudly saying ‘we’re hoarding cash’.
Marian Azer: They’ve probably had derivatives or ETFs sitting there in the background.Jim Karelas: There’s a big difference between hoarding funds and holding cash
in your asset allocation. It’s the ability to separate their liquidity from their
exposures that gives super funds another tool up their sleeve. Michael Bailey: Let’s talk briefly about the transition
management market itself.
you made the observation that the investment banks are wanting to take risk off
the table, and we’ve seen some publicised pull-backs globally from the
transition management market.
Does that mean less choice in the transition
management market at a time where, arguably, funds need it more? Troy Rieck: A period of consolidation has been overdue. What we were obviously
telling clients preceding this was, an important part of transition management
for any service provider is to have a panel, because there will come times
where, for one reason or another, especially with investment banks, you’re going
to have some of risk of them either not being there, or not being there in
their full capacity.
The period of consolidation is now actually occurring. So
I think from price perspectives, the clients have had their panels in place, so
they’ve got different providers in place with different styles. So for those particular
clients it’s not too much of an issue, but it certainly addresses the fact that
they need to take stock of their particular transition management provider. The
ones obviously that will survive are the ones that have actually increased their
capabilities in that space and for one reason or other have consolidated with
It’s a good space to be in if you’re on that side of the fence. If
the business is not an extension of a particular trading function, and it’s a business
in its own right with potential conflicts being managed, and obviously as part
of the consolidation that particular provider has survived, then it’s a very
good space to be in. Less competition. Drew Vaughan: The
reality was, certainly in the Australian market place, pretty much every retail
broker had someone with ‘transition management’ written on their business card.
That usually meant they’re exclusively going to be able to handle Aussie equities,
and that’s about it. And they may have a particular skill set in a particular
segment of the Australian market, but it’s a very narrow definition. The
transition managers that will survive are the ones that have the ability to have
a breadth of asset class exposures, a breadth of market exposures. Jim Karelas: Global by nature. Drew
Vaughan: And then the panel need
comes in, because of the counterparty risk problem.
Because there will be times
that you simply can’t deal with one transition manager because of counterparty
exposure in the rest of the portfolio, and it will be prudent to have someone
else on the panel. Troy Rieck: For us it’s an inner panel and an outer panel.
There’s a group of people who understand our needs and have worked well for us
in the past. We want strategic partnerships, with potential conflicts on the
table – daylight is the best antiseptic. Then there’s a broad panel of people
including some of our asset class specialists.
You’ve got to find people you
can trust and you can put your hand on your heart and stand in front of your
fiduciaries and say, yeah, these guys understand what you want and they’ve done
a good job, and you can trust them. Jim Karelas: In a
market that’s more volatile the most important, first thing is to run a
definitive pre-trade, analysis, to give an indication of what the constraints are
within the portfolio.
Fixed income’s been a classic example in the last three
months whereby we’ve had to have a two-phased approach – the liquid portion and
the longer proportion which actually requires a lot more work to it. So these
are the discussions we have with the clients saying, you know, besides the fact
there are volatile times, so your opportunity costs are actually going to blow
out and it can potentially cost you a lot more, at the same time there are
risks inherent within your portfolio due to liquidity constraints.
Fenella Gray: We’re finding stakeholders are a lot more interested in being
updated on an intra-day basis during the transition process. Before it was
probably once a week or at the end of the transition, but now there’s an
interest. ‘How’s it going? What are the trends today? How are you tracking against
benchmark?’ Jim Karelas: Particularly when you’re getting 3-5 per cent
moves overnight on the global market. If you’ve been benchmarked at the prior
night’s close, then if the market’s 5 per cent down overnight, then you’re
already behind the eight-ball from a performance perspective.
So clients are
becoming a lot more savvy and a lot more aware because it’s obviously going to
affect their performance. Michael Bailey: Has the T-Charter (a global performance measurement standard
signed by most major transition managers) engendered greater confidence in
using transition managers and making transitions? Troy Rieck: Yes and no. I worry that it leaves out a big chunk of risk which
is the time delay between making a decision and actually starting. So the implementation
short fall measure is… all else being equal, is probably a good measure, but
you need to include all the risks in that.
So the risk of waiting for a month or
two months, or three months, who’s going to be held accountable for that? Who
makes that decision and on what basis? At the moment it’s only measured from
the time you pick up the phone to Jim and say, right, we’re going. Who’s
accountable for before that phone call’s made? I hope to see increased requirements
for reporting post trade analysis.
To some extent funds previously may have
thought their job was to pick the active managers and not worry about the
alpha. Okay transitions occur and that incurs costs, but it’s there. Take
responsibility for the whole box and dice. They’re much more interested now.
And the flip side from that will be a greater accountability for the entire
decision making chain. Jim Karelas: The trend with certain fund managers is,
certainly from a transaction cost analysis or total implementation short fall
analysis perspective, is, as soon as an analyst decides that they like a stock,
they’ll basically time stamp the particular stock.
So they have a look at the
price and it could take maybe a three to six week period to analyse that stock,
and it finally gets in the portfolio. So in terms of measuring the total implementation
short fall, the cost has been from that time stamp. Well six weeks ago the
price was this. We’ve actually got it in our portfolio on T. So they actually
do measure the period in between in terms of what the cost has been in not
having it there.
Drew Vaughan: I think the other wrinkle in here which the
T-Charter doesn’t always address well, is the distortion in the Australian
market place caused by the imputation credit model that exists here, which
encourages funds to hold physical equities to derive dividends which have
imputation credits which are fully franked attached to them. And then penalises
them if they transact them within certain time periods.
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
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.