Written By: Graham Cook, CFA
Much progress has been made: The pools have been (to varying degrees) firmly established, potentially complex organisational and governance structures have been put in place, requisite licenses have been awarded, and the teams that will pick up the baton and deliver pooling in practice are being carefully built.
All this heavy lifting has laid solid foundations for the pools to deliver the much anticipated benefits, but one final step remains in the process, and it merits the same level of meticulous planning, focus, attention to detail, and, importantly, co-operation to achieve a successful launch. Central to this will be the application of the same project management principles that helped the pools reach this point.
At the time of writing, the pools generally appear to be preparing for the launch of the investment funds that will constitute the physical manifestation of pooling, the end game that this effort has been directed towards.
This launch phase itself has a number of sequential stages that need to be successfully completed in order to move to the next:
1. Establishing the range of funds to be offered
- Identifying the assets to be pooled
- Deciding whether an active management approach should be included
- Deciding on the balance of internal and external management of the assets
- Identifying any requirements for specialised funds (e.g low carbon or smart beta equities) and whether these should be incorporated into the core or offered as an additional option
2. Identifying the most appropriate form the pooled vehicle should take (e.g through an Authorised Contractual Scheme “ACS”)
3. Agreeing with stakeholders how the vehicle should operate
4. Selecting managers and the allocation between the managers
5. Transitioning legacy assets into the pooled vehicles
Two points stand out as unique challenges in this process that merit further consideration: establishing the operating rules and incorporating these into an operating model that all stakeholders can work to and the transitioning of substantial investment portfolios into the pools.
Publishing the prospectus – the document that governs the operation of the fund – is a task that is easy to underestimate, at least at first sight, in terms of the level of detail to be agreed between the many stakeholders involved in the fund’s operation. These stakeholders include the LGPS funds, the Authorised Fund Manager (AFM), the custodian, and where applicable, service providers such as the administrator or depository. What may seem like a minor detail could have very different implications for each stakeholder. Ultimately, a clear vision and cooperation enables a smoother and more effective process.
The physical transitioning of assets is the final step of the process, but in order for this most visible aspect to be successful, it needs to be fully integrated throughout the preparations for launch.
Here, engaging the services of a specialised transition manager from the outset can be of significant benefit, bringing to the table project management expertise, detailed and insightful cost and risk analysis, as well as expertise in executing the required trades in a way that minimises cost and risk.
Below are some of the ways that a transition manager, fully engaged early in the process, can assist:
- Understanding and articulating the vision
This is perhaps the most fundamental and important activity, allowing a clear view for all parties as to what the goal is, the objectives and constraints, and the critical activities needed to achieve the goal.
- Identifying the risks
Risks need to be identified as early as possible, so that these can be appraised, and a comprehensive risk management strategy can be incorporated into the transition plan.
- Appraising different routes to pooling
To be truly powerful, it is essential to understand the implications of the cost sharing principles of the pool. Should the transition be completed in co-operation as separate entities, or together within the pool? If in co-operation, is it appropriate to transition all funds together, or are there more optimal subsets that would lower costs?
- Developing an implementation plan
An experienced Transition Manager can set all of this information out in a detailed plan of action, designed specifically to meet the pool’s objectives and constraints whilst minimising both the identified risks and the costs (in aggregate and for each participating fund).
- Organising all of the relevant stakeholders
With so many moving parts and stakeholders to take into consideration, clear and effective communication between all parties along with robust project management is critical to manage operational risk and ensure a smooth implementation.
- Providing a full audit trail
Recording all communication, the analysis provided, the decisions made, the plans implemented and the costs incurred will ensure that the process can be evidenced and understood long into the future, and also enables the discipline of feedback and learning.
How to choose a transition manager
Once the decision has been made to engage the services of a transition manager, the challenge of choosing between a host of potentially unfamiliar providers remains.
Single or panel?
One important decision is whether any single transition manager will be the most appropriate to undertake all aspects of the restructuring. This may require expertise across a variety of asset classes, geographies and market sector. A sensible (and common) approach may well be to appoint a panel of two to three transition managers so that a best-in-class provider for your specific requirements is available to use.
In selecting either a single or panel of providers, a useful framework is to understand your general requirements; then for specific projects, identify the specialist skills that will be required and who can provide these.
What are your general requirements?
These are essentials that you value and which the transition manager must be able to consistently deliver to the required standard, irrespective of the change to be implemented.
This would include items such as:
- Clear and robust pre-trade analysis and cost estimates.
- Straight through processing capability, ability to instruct settlement of trades by SWIFT messaging.
- Experienced project managers able to navigate a variety of assignments in any market condition.
- Access to liquidity and trading expertise across asset classes and geographies.
- Detailed and transparent post trade reporting.
- Full accountability for and control of all aspects of transitioning activity.
Fortunately for public sector funds in the UK, the LGPS National Framework for Transition Management is a perfect starting point, with managers appointed to the framework having already successfully completed a selection process that ensures that they meet general requirements, as well as specific LGPS requirements.
Where are your biggest challenges?
This will determine which specialist skills to emphasise in appraising the options. The types of questions to ask include:
- Is the event complex, requiring detailed scenario analysis and ability to estimate costs across different dimensions?
- Is it complex because of the range of stakeholders involved requiring clear communication and superior project management expertise?
- Is there an asset class focus in which one of the potential transition managers has a clear edge in minimising costs? For example, an ability to directly execute equity and currency in emerging markets can significantly reduce costs in a global equity restructure.
- Is there a material element of pooled fund investments involved? These assets require an enhanced assessment in order to determine the most effective route for subscription or redemption, and to ensure that costs and risks are fully understood and mitigated. Pooled fund investments are notoriously non-homogenous: valued at different times; trading and settling on non-standard cycles; varied cost calculations and perhaps most importantly, often with a choice of cash or in-specie modes of subscription or redemption. The various vehicles also have different implications for tax (stamp duty) that need to be incorporated into the analysis.
- Is the restructure large enough to require specialist block trading to minimise impact?
Other important considerations
Understanding the chain of care
Outsourcing any aspect of the transition management project inevitably introduces additional complexities, increasing operational risk, making information containment more difficult and weakening the direct responsibility of the appointed transition manager. A full, unbroken chain of care ensures accountability, a close alignment of interests and a strong bind between the transition manager and the results achieved.
Alignment of interests
One of the most important aspects in any significant project is ensuring the interests between the service provider and the fund are aligned. We believe that the most effective way of achieving this is through granular and real time transparency into all aspects of a transition, ensuring that your provider does not outsource key activities that cloud this transparency. Transparency should be especially strong around both transition manager remuneration and all direct and indirect revenue that may accrue to external counterparties chosen on the funds behalf.
It is also useful to be reminded of the difference between transparency and disclosure. Transparency means having access to all information whilst not having the important insights obscured under a mass of detail. Indiscriminate mass disclosure is not the same as transparency.
Whilst the task to deliver pooling in practice is undoubtedly complex, there remains however a great opportunity to instil best practice in change management early in an organisation’s history that will reap rewards for years to come. Engaging the right transition manager will get you there much sooner.
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Published: May 1, 2018
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