Some advisory with your transition management, sir?

Many of the trends that emerged in transition management last year will continue this year, says Justin Balogh, Tokyo-based senior managing director at State Street Global Markets. While few managers would say 2009 was a "good" year, the upsets in the market stemming from 2008's crunch prompted many investors to change strategy and, especially in Asia, engage transition specialists for the first time.

Many providers took advantage of the region's increased activity to beef up their regional teams. In October, Russell Investment Services appointed John Moore as its new Asia-Pacific executive director, the firm's highest post in the region, and then Northern Trust's new regional chief executive Teresa Parker highlighted plans to expand the US group's transition business in a recent interview.

After being named best Asia-Pacific transition manager by AsianInvestor for 2009, nine-year transition industry veteran Balogh looks back over 2009 and makes some forecasts on what's to come.

Looking back over 2009, what were the leading trends in Asia-Pacific transition management? 

Transition management in Asia-Pacific throughout 2009 evolved into a discussion that, due to the turmoil of financial markets, saw clients becoming much more focused on understanding the implications of portfolio risk on rebalancing and restructuring assignments. Even over short time frames, how portfolios behaved and how their underlying composition reacted to volatile markets had a significant impact on the expected performance costs associated with transitioning assets.

Transition managers that demonstrated the clearest competency in identifying and mitigating portfolio risk captured market share in this challenging environment. Clients demanded agility from transition-management providers in correctly mapping risk management and execution strategies to differing market regimes, which at times were changing daily and weekly.

In terms of the types of transitions, which trends stood out in 2009?
In 2009, the most consistent theme was the move away from active strategies in equities and fixed income and into core beta exposure, as clients took the opportunity to build core market exposure and shift from higher-fee strategies that had failed to deliver alpha. Furthermore, the concept of utilising more interim mandate structures and taking beta exposure through shorter time frame-listed derivatives structures gave clients a way to act quickly on poor external manager performance. 

Implementations from cash were also a popular, as substantial numbers of investors who continued to receive positive cash flows and/or held larger cash positions during the crisis began to invest across public markets and take exposures in global fixed income and equities.    

What developments do your foresee in Asia-Pacific transition management this year?
Based on the experiences of late 2008 and 2009, and given how portfolio behaviour surprised many institutional investors, many clients began to ask more of their transition-management providers. They sought information and advice not only on the best means to execute a transition portfolio, but also about earlier stages of the decision-making process, such as differing approaches to fund construction, asset selection and tools for creating more robust risk management frameworks.

We expect this theme to continue through this year as clients look beyond the basics of a transition-management provider and expect the bundling of a range of advisory research and supporting products to help them navigate through 2010.

Asia became increasingly important for global transition managers in 2009 -- do you expect this trend to continue this year?
In 2010, many more transition management players will naturally seek to represent their services in the Asia-Pacific region. Given the diversity of the region in terms of its locations and jurisdictions, and in the means by which transition-management business can be executed, this will continue to require a fuller commitment on behalf of providers who aspire to grow market share.

We expect continued growth across the region, as clients move through the phases of the portfolio-construction or rebalancing processes. Of particular note will be China, Japan and Korea, as the significant asset pools in those markets further embrace the product. The Australian market will also continue to consistently provide mandate opportunities across the public, corporate and self-managed client segments.

However given Asia-Pacific's comparatively more concentrated, yet shorter overall client list compared to North America and Europe, competition among providers will be strong. Those providing the best combination of overall services and local representation will grow market share.

What do you think the impact of the proposed financial regulation overhauls in the US and Europe will be on transition management in Asia?
It is difficult to draw a direct link between US and European regulatory changes and their impact in Asia, particularly given the diversity of jurisdictions across the region. Perhaps the Asia-Pacific client-base will take note of the greater scrutiny of business models and product offerings that has resulted from the financial crisis, as they review potential service providers.