“A lot of transition clients explicitly ask for trading to begin ahead of the point at which the benchmark for implementation shortfall is set,” according to one large UK institutional investor, who is a regular user of TM services. “Of course it depends on the funds’ governance and other factors, but the question really is how important it is to begin moving assets before the IS point is reached. This naturally leads to the question of how important IS is as a measure of success for a client.”
Especially in the case of transitions that involve more volatile assets or the duration of the transition will be more lengthy, the usefulness of IS can be more limited.
Graham Dixon, specialist transitions adviser at Inalytics, says: “From the clients’ perspective, if you know what you want to do, it is better to take any risk off the table as soon as possible. It has certainly become established practice to put hedges in place on T-1 or even before. It is more important that the strategy is agreed and the client understands that implementation shortfall requires careful interpretation, particularly where large trades are happening. You have to delve into implementation shortfall and really understand why it is what it is.”
UNIVERSAL MEASURE
So while IS may not always be that important to how a client views a specific transition, at the industry level, it remains an important metric. It sits at the heart of the T-Standard, an established measure for the all-in costs, both explicit and implicit, of a transition.
As such it does have a value in helping asset owners answer the question of how much a restructuring is costing them in asset value. It can work to highlight costs that are otherwise hidden including the true costs of pre-hedging and how much market impact a transition is having.
This is particularly important for institutions who may not be that experienced in transitioning assets or using TMs.
In order to be useful, however, IS must be an objective measure. It cannot be influenced by the transition manager or the transition process. But that is what T-1 trading does, whether intentionally or not.
It is also a consistent measure regardless of how unique the underlying transition may be in terms of the assets being restructured or the strategy for doing so.
Minderides argues: “IS isn’t something you need to treat differently for each transition. It has a universal meaning and doesn’t mean a transition has to be managed in a particular way. It is a way to measure a transition in as objective a way as possible.”
Objectivity is where the crux of the issues lies with T-1 trading.
STANDARD PRACTICE
Chris Adolph, head of transition management EMEA at Russell Investments states: “Trading into a benchmark is not T-Standard practice and is not common practice.”
Evaluation of a TM’s performance using the T-Standard methodology is an important aspect of the T-Charter, the industry’s code of best practice. But this issue has proven contentious.
According to Martin Mannion, head of trustee services at the John Lewis Partnership and chair of the T-Charter committee, the debate about implementation shortfall has been “endless” and is one reason why some providers chose not to sign up to the T-Charter.
The objectivity of a benchmark is critical in determining how useful it measures performance, which raises important questions for investors about if their TM provider is suggesting this strategy. If T-1 trading impacts the benchmark for measuring IS then it is not truly objective.
It is, after all, a TM’s job to minimise performance impact on the client so it makes a lot of sense to measure their performance this way. However, it is just one measure and may not always be the best one for a specific investor for a specific transition.
As Adolph says: “Is IS just a measure of cost relative to a particular point in time. The question is whether that is the most relevant benchmark for a client.”
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