Bringing you live news and features since 2013
Bringing you news, views and analysis since 2013
Man with binnoculars

8036

Investors should look beyond typical measurements when assessing changes in asset allocations or investment managers. says BNY Mellon

RELATED TOPICS​

Institutional investors should review information that goes beyond the typical scorecard that they use, called the "implementation shortfall," when they gauge the success of changing the asset allocation of a portfolio or switching asset managers. That is one of the key conclusions of a new study from Mellon Transition Management (MTM), the transition management specialist for BNY Mellon Asset Management.  

The report urges investors to break down the components of the implementation shortfall cost and focus on the implicit costs of their transitions.

The report, which recently appeared in the summer edition of the Journal of Investing, notes that the implementation shortfall includes both the implicit costs and explicit costs. The explicit costs include spreads, commissions, taxes and fees incurred in selling the securities in the old portfolio and buying the securities in the new one.

Implicit costs include the market impact of the trades and the price movements of the securities during the transition period.  The price gap between the end of one trading day and the start of the next also could be a factor in the cost of a transition that extends over more than one day, the report said.  A successful transition minimizes the impact of the implicit costs, which often are not as well understood by plan sponsors as well as the explicit costs, the MTM report notes.

"How the attribution of these implicit costs are calculated and presented can have a major impact on how the success of a transition is perceived," says Graham C Cook, vice president at MTM and the report’s author.  "Implicit costs are difficult to separate out, but a careful analysis can reveal additional insights into the skills of the transition manager."

The report outlines several trading benchmarks and discusses their usefulness to institutions in both gauging execution performance and attributing between the implicit costs.   These benchmarks can be based on the previous day’s closing price of the securities, the prices of the securities at the close of the transition, or the trading period average prices of the securities.

An important component in determining the success of the transition is how much of a trade off is made between rapidly trading the portfolio components versus making smaller trades over a longer period of time.  Trading a significant portion of the portfolio over a compressed time period can quickly reposition the portfolio to take advantage of market opportunities, while making smaller trades over a longer period of time could minimize the impact of the trades on the prices of the securities being traded, the report says.

"Analysing the implicit costs and using the right benchmark can help to reveal whether the transition manager has made the most of the liquidity available during the transition, whilst managing risk," Cook says.  "Achieving the optimal balance between the impact of the trades on the markets and the risk of prices drifting adversely is the key to a successful transition."

Latest News

EFAMA has commented on today’s vote by the European Parliament in favour of a new..
Morgan Stanley Investment Management (MSIM) has announced the launch of the MS INVF Systematic Liquid..
Confidence in the continuing strength of bitcoin and Ethereum is driving wider interest in altcoins..

Related Articles

Juan Nozal, Mapfre Asset Management
Juan Nozal, Fixed Income Portfolio Manager at MAPFRE Asset Management, talks about the outlook for fixed income assets over 2024, in what he predicts will be an outstanding year for this asset class...
Juan Nozal, Fixed Income Portfolio Manager at MAPFRE Asset Management, talks about the outlook for fixed income assets over 2024,..
n response to the increased attention to climate change risk, institutional investors, asset managers, and asset owners in the US are committed to implementing a variety of measures to address climate change and reach their net-zero goals, according to Cerulli Associates...
n response to the increased attention to climate change risk, institutional investors, asset managers, and asset owners in the US..
Lord Hollick, House of Lords
A House of Lords committee has raised “significant concerns” over the role of UK regulators, their ability to operate with genuine independence from government and how they are held to account...
A House of Lords committee has raised “significant concerns” over the role of UK regulators, their ability to operate with..
Rob Edwards, Morningstar
The complexities of assessing performance from responsible investment strategies have been laid bare after Morningstar’s ESG indices delivered a mixed bag in 2023...
The complexities of assessing performance from responsible investment strategies have been laid bare after Morningstar’s ESG indices delivered a mixed..
Subscribe to the Institutional Asset Manager newsletter

Subscribe for access to our weekly newsletter, newsletter archive, updates on the site and exclusive email content.

Marketing by