As pension plans increasingly focus on the underlying costs and fees involved in managing their money, opportunities for transitions have shifted. Northern Trust is standing out by offering customised transition solutions for clients and stakeholders in an evolving landscape
The shift from active to passive management has been one of the biggest trends of the past few years – ballooning the assets of passive managers and reducing the fund sizes of those more inclined to pick individual securities to generate alpha.
That trend has also had an impact on transition management. Northern Trust, named this year’s transition management provider of the year at the Custody Risk Global Awards, has witnessed a consolidation in the number of transitions per year. Yet, whereas the amount of transitions has declined, the complexity, size of events and number of people involved has risen.
“The broad trend we’ve come across is a substantial increase in the level of complexity of the transitions we work on,” says David McPhillips, transition management strategist at Northern Trust.
“If I think of the early days in this space, the events were largely vanilla – that is, terminating one manager for another. Now the events rely on multiple managers, both on the legacy and the target side; there are a lot more stakeholders at the table, as well as more co-ordination and project management. Northern Trust is also acting to provide more customised solutions for clients and stakeholders.”
These large events now generally display two key characteristics, he says. The first is where a big pension plan with multiple billions of dollars in assets under management hires a firm such as Northern Trust to transition those large portfolios, and the second is where there are a lot of moving parts.
For example, if a corporate pension plan with numerous investments decides to consolidate that number or restructure across asset classes, there tend to be a lot more investment managers involved – in some cases stretching to 10 or more.
“Our bread and butter at Northern Trust is project management and organisation, so the changing landscape plays into our expertise. The more complex a transition gets, the more it draws on our expertise,” says McPhillips.
The changes affecting the industry are tied to the broad consolidation in the marketplace, as the fees being charged by investment managers and the transparency around that process have been put in the spotlight, particularly in the wake of the second Markets in Financial Instruments (Mifid II) legislation, which came into effect in January last year.
Custody Risk Global
Transition management provider of the year
Custodian of the year UK & Ireland
In the past, a pension plan could have had around 40 investment managers running the firm’s equities assets but, in a post-Mifid II world, pension plans are now more incentivised to focus on the underlying costs and fees involved in managing their money. This has seen the number of investment managers hired by the plan decrease to a handful – fewer money managers means fewer opportunities for transitions.
“There is much more movement towards best-in-class managers for any given asset class,” says McPhillips, who explains this has happened in UK local government pension plans. “Rather than having myriad investment managers managing money on behalf of numerous local government authorities, they decided to consolidate that within pools and narrow the scope and oversight of those managers. That broad theme is going to exist across pension plans and other asset pools in the near future.”
Despite the consolidation going on in the industry, Northern Trust has managed to separate itself from the pack thanks to continued investment in the space to provide a deeper offering to clients.
The firm’s acquisition of Aviate Global in 2016 helped to expand its global trading capabilities, and the benefits of the acquisition are coming to the fore.
The business now has a number of traders sitting in London assisting its transition management desk in the UK and the rest of Europe, the Middle East and Africa (Emea).
“Transition management was a strategic priority for Northern Trust in Emea, and it has helped immensely with our trade execution part of the transition cycle. While the equities world is largely electronic, having fixed income bond traders on hand in the region with local relationships has accelerated our product exponentially,” says McPhillips.
Northern Trust has also invested in its transition management franchise with the 2017 appointment of industry veteran Craig Blackbourn as its Emea head, along with several new hires to the team.
On top of that, Northern Trust has configured its Transaction Cost Analysis tools for pre- and post-trade.
McPhillips says: “We’ve spent time making them more customisable for clients because they need to see data that fits with their reporting preferences. It’s a good example of how we’re a bit more nimble than some larger firms – we have the size, scale and technology, but we’re not encumbered by a slow-moving organisation.”