The number of banks that actively pursue transition mandates is expected to drop over the next two years, according to new a study from research and consulting firm Tabb Group.
In the research note, ‘The Optimal Transition: Mitigating Risk and Minimising Market Impact,’ Tabb Group analyst Monica Schulz predicted that investment banks in particular will curtail their transition management activity.
“Given the Street’s current cost-cutting environment, along with the transition business’s relatively slim margins, as compared to those of programme trading, Tabb Group expects that several of the current investment bank players will make a soft exit from the business,” she wrote.
Elsewhere in the study, Schulz highlighted the transformation that has taken place in the transition management business recently. She explained that prudent asset owners have become more liberal in their use of transition managers. Historically, transition management was a service used exclusively for the movement of equity portfolios. But today, she said, “the complexity of asset movements vary drastically and more asset owners are sending other types of assets, including fixed income and foreign currency transitions, to transition managers.”
Twenty years ago, the transition management industry focused its efforts on protecting the value of transitioning assets against operational risks, according to the study. Currently, said Schulz, “it focuses on mitigating opportunity cost, market impact and other investment and trading risks.”
Transition management firms use risk analytics to schedule orders according to a variety of factors. In addition, the study says, transition managers are developing algorithm technology that interacts with pools of liquidity to complete orders as efficiently as possible.
The transition management industry trades more than $2 trillion worth of assets worldwide each year, according to the study. It adds that transition managers now receive about 45% of all mandates to mitigate the risks associated with increasingly complex, global, multi-asset portfolios for institutional investors.