Being a global custodian has given Mellon Global Investments a somewhat unique approach to the highly specialist area of transition management.
According to the president of Mellon Transition Management Services, Mark Keleher the company’s strong background in custody has provided it with a solid knowledge-base which can be translated to meeting the needs of clients.
He said this was particularly the case with respect to client companies looking for support in undertaking more complex multi-country, multi-currency transitions.
Mellon Transition Management is making no secret of its strong custodial background as it seeks to expand its presence in the Australian marketplace.
Mellon has come to Australia with the promise of a virtual end-to-end transition management service within which it takes total responsibility for the outcome.
“Our approach at Mellon provides each client with a unique service and a dedicated team taking full responsibility for designing and then implementing a total transition solution,” he said.
“We are committed to managing the entire process, not just executing the necessary trades but providing an end-to-end solution, relieving clients of responsibility for custody and legacy issues,” Keleher said.
He said that the investment community recognised that dedicated transition specialists could significantly lower the inherent costs and risks far more effectively than plans, broker dealers or traditional money manger can do on their own when moving assets from one investment manager to the next.
In an interview with Super Review last month, Keleher said that people looking for specialists in transition management did not necessarily need to look for a firm with a strong background in custody but that it “helped to have a great deal of knowledge on the custody side”.
“However, not every custodian has the resources we do to put together a dedicated transition management team,” he said.
Keleher makes it clear, however, that good transition managers do not always assist clients to undertake a transition. Sometimes they point out to clients the inherent costs and advise against such a strategy.
He said that during his current trip to Australia he had been involved in assessing the merits of a proposed transition for a major institutional client.
Keleher said that on the basis of the commission costs which would have been incurred by the client, Mellon had recommended against transition.
“The bottom line where transitions are concerned is that you need to put the interests of the client first,” he said.
How big is the market for specialist transition managers? Well, according to Keleher, over US$ 1 trillion worth of securities are transitioned annually on a global basis.
He said that not only did transition management reduce the direct cost of trading, it also controlled the risks that could increase direct trading costs.
“Such costs don’t just include commissions and bid-offer spreads,” Keleher said. “They can also include the far more significant impact of lost opportunities.”
He said it was estimated that the average block-size trade cost about 1.13 per cent.
“Commissions and bid-offer spreads make up only about 21 per cent of the cost while market impact and opportunity costs make up the remaining 79 per cent,” Keleher said.
He said that risk analysis and management were key to a successfully managed transition.
“By accurately modelling the risk profile of both the legacy and target portfolios, the transition manager can develop a detailed and disciplined trading program that effectively uses all available trading styles,” Keleher said.
He said that by carefully executing the program, the manager could transition the portfolio at minimum total cost to the plan sponsor.
“An important part of the execution strategy is to continually monitor and, when appropriate, eliminate specific and residual risks that may occur while trading the portfolio,” Keleher said.
He said market impact could be controlled by extending the trading horizon, taking advantage of crossing opportunities when available and sourcing liquidity in the marketplace.
“Typically, a combination of these methods is used during a transition to reduce the total market impact of a portfolio,” Keleher said.
He said it was important to manage the residual risk between the legacy portfolio and the target portfolio to reduce opportunity costs.
“Often it is more advantageous to absorb market impact than to bear the opportunity cots associated with a high level of residual risk,” Keleher said.
