Among the characteristic economic trends since the financial downturn is a distinct slowdown in institutional investors’ pace in changing either investment managers or asset allocations.

While some of the reasons for the general slowdown may be topics of intense debate, there are also solid theories on the most influential causes underlying the slower economic movement.

“We’ve really noticed a change in just how long it’s taking the typical institutional client to make some of these changes,” said Jamie Cashman, a managing director in marketing at Mellon Transition Management. “And we see that reflected in a number of different ways.”

Key characteristics of transition management as business science explain its development as a quantifiable application of huge institutional value.

“Transition management started out on the traditional defined-benefit side, with the plan-sponsor community trying to identify a way to keep transaction costs low,” Cashman said. “It’s typically been limited to use by institutions because of the scale.

“Large institutions routinely make changes, either because a manager is underperforming or, say, at the fund level they’re changing their investment strategy, their asset-allocation mix. They bring the transition manager in to help them get there.

“The transition manager helps them map out what’s the most cost-effective, risk-controlled way to get from A to B, in order to preserve the asset value. They don’t want to lose asset value in the course of changing horses.”

Relatively recent changes in institutional behavior have exhibited contrasts quite distinct from the manners in which transition management and asset allocation have traditionally been dealt with.

“Our experience had been that we would be brought in at, kind of, the eleventh hour,” said Cashman. “The client had already made the decision that they were going to rebalance their fund, or they were making asset-allocation changes. Or maybe they didn’t want to be so heavily weighted in equities – they wanted to have more money in fixed income.

“Or they may have made the decision that this manager they’ve been suffering underperformance with for years, they wanted to get rid of and appoint another manager. So it was typical that we would be notified to come in – and a couple of weeks later, we would’ve completed everything.”

The first changes in the pattern were somewhat subtle, but the duration required to complete the full transaction process quickly became pretty noticeable.

“Over time, we’ve gotten more involved helping clients think through these issues, so it’s not so often that we’re brought in at the eleventh hour,” Cashman said. “But now, what we’ve really noticed is just how long the entire process is taking. And we see that reflected in a number of different ways – just the length of time in the appointment cycles.

“We’ve seen it extended significantly, where we’ve been hired for mandates, and it’s taken, in some cases, over a year for the client to complete those mandates.”

There are a few viable explanations for the general slowdown, many relating to more strident regulatory requirements, combined with natural caution in the midst of uncertain economic trends.

“Being able logistically to get everything done has become a big struggle for clients,” Cashman said. “Part of that we’ve attributed to the heightened regulatory environment – the fact that there’s greater scrutiny placed on, really, all participants involved in this process. But it’s particularly on the part of the institutional investor, who usually reports in to a board.

“There’s been a lot of scrutiny placed on the changes, and additional time has been placed in these management reviews and in the asset-allocation review process. Also, the contracting phase of it seems to take longer – where the clients are appointing new managers, getting that contracting done.

“People are just exceptionally cautious right now – not only dotting i’s and crossing t’s, but having it reviewed and reviewed again before they actually go through with some of these changes.

Instant Insights /

Institutional investors slow to change investment managers, asset allocations

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