dec09

in the one field that refuses to rationalise

Interest rates are not the only thing going up in Australia in defiance of the rest of the world. While the transition management marketplaces of London and New York have seen a number of investment banks exit, or at least ‘transition transition’ into their custody or asset management affiliates, in Australia the broker-dealers are standing strong, and in 2009 have even been joined by new competitors claiming ‘purer’ models.

Yet this abundance creates a problem for the chief investment officer wanting to move from Manager A to B. At least a dozen competitors are marketing seriously in Australia, and putting as many different spins on their service while doing so. These spins range from broker-dealer to pure agency multi-broker, asset manager, liquidity arranger, or project manager/consultant. So, a CIO could spend as long determining the right transition manager as they did deciding to transition in the first place.

MICHAEL BAILEY gets some guidance from consultants, and asks the transition managers (TMs) themselves, about how best to differentiate and negotiate in the transition management milieu.

The murky dozen: Who’s who in transition management

You know something is complicated when somebody can get paid to consult on it. Former Intech managing director, Brett Elvish, has found so many chief investment officers confused about the ever-expanding range of transition options available to them that he’s been able to begin running transition manager due diligence projects in addition to his custody advisory work. There are worse times to be in the transition business. At this point last year, the only transition most funds wanted to make was cash out of their dwindling equity portfolios, cash in to their currency hedges or private equity capital calls.

Faced with a market in paralysis and record high trading costs, about the best transition managers could hope for was the odd ‘interim’ mandate for investors who’d pulled their money from an imploding manager, but couldn’t decide what to do with it next. Then equity markets and decent liquidity turned up before Easter, and what had been a trickle of fixed income transitions turned into a steadier stream of asset allocation changes and switches from passive to active equity mandates, as funds attempted to make up some of the $25 billion they had lost on the ASX. Sorting through a dozen transition management competitors may appear daunting, but Elvish says the most important differentiator among them is easy to determine and understand.

“There are obviously the differences between people you get in any other business, a few subtle differences in the systems, but the core divide is whether they are a broker-dealer, transacting exclusively via their affiliated network and occasionally negotiating a principal trade, or the guys under the ‘pure agency’ umbrella who have a panel of brokers and farm out the transition trades depending on where they can get the best execution.” These broker-dealers are the names we all know. Always near the top of the tree in terms of market share is Citi, which was put there by Mark Levinson and seems to have maintained the position since his understudy, Michael Jackett- Simpson, took the helm when Levinson jumped to Goldman Sachs JBWere last year.

Citi’s seven-man UK transitions team (lead by Tim Wilkinson, the man who hired both Levinson and Jackett- Simpson) might have walked across the divide to ‘pure agency’ player Mellon back in March, but in Australia Jackett- Simpson’s team are reputed to have performed transitions for seven of the 10 largest super funds during 2009. A clear differentiator for Citi is that it is the only transition manager active in the Australian market to have become a member of the Liquidnet ‘dark pool’ crossing network. Most brokers prefer to rely exclusively on their own electronic crossing networks (ECNs) and dark pools, but in 2008 Citi wasn’t too proud to join up “as an acknowledgment that we operate in a competitive field”, Jackett-Simpson says.

A sweet spot for Liquidnet is in crossing institutional quantities of mid and small-cap stocks, whose spreads can be ravaged by market impact if a lid is not kept on information leakage. Liquidnet co-head in Australia, Steve Zilioli, says that while the average ASX trade is about $10,000, on Liquidnet it’s $1.2 million. And yet, 60 per cent of its trades happen at the ‘mid’ between the buy and sell spreads, while virtually 100 per cent happen within those spreads. He is in discussions with other broker-dealer transition managers about becoming members, and is confident others will follow Citi’s “brave” decision. Transition management is by definition a business where discretion rules, so it’s impossible to know how much market share Mark Levinson has attracted from Citi over to Goldman Sachs JBWere.

However, Levinson can talk confidently of fee trends in the market, indicating his new shop – whose dealing desk is number four for Australian equities so far in 2009 – is also near the top of the transitions game. Increased competition has pushed fees to the edge of zero or even over, but Levinson says recently client focus has been more on the additional services clients can gain, particularly through more complex transitions, such as access to ESG research and analysis. Other broker players include Deutsche Bank under David Foodey, who at seven years is the longest tenured chief of any of the investment bank-owned shops, and whose three-person team can plug into a trading desk that has

Value of Australian equities traded, Jan 1-Nov 16, 2009
Broker Value Trades ($bn) Market share (%)
1. UBS 212 10.1
2. Macquarie Insto 198 9.4
3. Deutsche 182 8.7
4. GSJBWere 173 8.3
5. Citi 169 8.1

turned over the third highest amount of Australian equities of any broker in 2009 (see IRESS table).

“The sell piece you have to do, but not the buy piece. We’re in touch with the target manager, and sometimes agree it’s better to hand over some cash than make a trade at a bad price for the client,” Foodey says. Then there is UBS, where the best-known faces are Nick Carrigan and Andrew Dalgleish. The bank may have shuttered its European transitions business last year, but in 2009 the guys project-managed just about the biggest transition there was – the massive domestic equities manager consolidation at AustralianSuper. Carrigan says UBS’ most obvious point of differentiation is its parent’s number one market share in Australian equities and global equities trading.

He also points to the addition of a proprietary dark pool two months ago, to which clients are able to post liquidity at the same time as interacting with markets, in effect having an ‘each way bet’ on which avenue will provide best execution. Laying claim to the broker-dealer model for equities transactions, J.P.Morgan’s model is slightly different in that it maintains a reporting line into the Worldwide Securities Services custody business, and offers a multi-broker agency model for the over-the-counter world of fixed income transitions. “Equities trading is pretty much commoditised, but you’re not offered the same price for 1000 of a bond issue as you would be for a million,” explains head of the transition team, Jim Karelas.

“J.P.Morgan is very strong on fixed income trading but they have to compete with the rest of the street to get trades from us.” Karelas says there are “operational efficiencies” if funds which happen to have their custody with J.P.Morgan also use his team for their transitions, particularly in regard to reduced counterparty risk. Another transitions player sitting between two affiliated divisions, in this case an asset management and an asset servicing/custody business, is Mellon Transition Management, which fills some orders through its global agency brokerage business, G-Port, and gave its Australian business a kickstart last year with the poaching of John Venardos from the helm of RBC Dexia’s custody based transitions operation.

Visiting Australia last month, new recruit Tim Wilkinson said Mellon’s lack of investment bank DNA was an important distinction in the wake of what’s happened offshore, particularly London. “The vagaries of the investment banking business have had a profound effect on transition management,” he says. “Clients need to have a look at who’s left standing and where. Are the changes temporary or permanent? Because demand (for TM) has come back in a major way.” Mellon TM has two staff in Sydney, including director Keith Griffiths, 10 in London and 38 in San Francisco. It acts as an agent but can arrange principal trades via third parties when required. It accesses three pre-trade models and a panel of multiple brokers.

Griffiths says it is important for super funds to ask the right questions of their TM managers. “You shouldn’t just focus on explicit costs…You should ask to see their track record, relative to their pre-trade estimates, over numerous periods such as a 5 year history.” “It is clear with these short term risk management exercises that there is a greater appetite for more transparency among Australian Superannuation funds.” The leading exemplar of the ‘pure’ asset manager-based transitions service in Australia is BlackRock Transition Management, which is said (not by them) to have transferred portfolios for The Future Fund, the ultimate ‘reference’ client on these shores. Liliana Colla leads the four-person team in Melbourne which forms part of a 19-person global team dedicated to transitions.

This has grown out of the buy-side dealing desk of the underlying funds management business. (This is a business which at near US$3 trillion will be the largest in the world once the purchase of Barclays Global Investors is finalised, creating what Colla calls “unprecedented” internal off-market crossing opportunities for transition clients – presumably the transition management teams of the two firms will also be combined.)


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