asset classes could be summed up in two
words: “risk on” or “risk off.”
But starting the second half of 2016, and
really accelerating after the U.S. Presidential
election, dispersion of asset prices returned
to the market. This is likely a contributing
factor to a noticeable pickup in transition
management activity. Price dispersion creates
opportunities and highlights risks inherent in
plans’ asset allocation.
Dispersion is up not only between asset
classes, but also at the sector and security
level. This enables outperformance by
active managers – in fact, we are seeing
active managers beginning to outperform:
preliminary data shows that a majority of
US equity large cap managers beat their
benchmark in 1H2017.
What is your approach to risk mitigation?
Cobbett: To mitigate risk, it has to be
identified and understood. With that in mind,
we employ multiple models. We don’t consider
models right or wrong; rather, we find them
either useful or not. For transition events, we
look at risk management using at least two
lenses. First, we look backward to see how
portfolios have tracked each other historically.
We look at closing prices going back a year,
six months, three months. How well have the
buy and sell portfolios tracked each other?
Second, we review how those numbers line up
with factor models based on forward-looking,
predictive tracking. Then we have a discussion
with the client about what we think the risks
are, and give them ideas about how their risk
could be minimized.
What role does technology play in transition
Cobbett: The world is governed by best
execution, and next-generation technology is
necessary to stay on top. Citi is continuously
investing in trading technologies. For example,
in equities, we recently rolled out Optimus 2.0,
a tool to help assess and choose from an array
of algorithms. It offers a road map to the
optimal path to implement the transition.
In fixed income, we have created technologies
that allow us to map and optimize our holdings
versus index and ETFs equivalents. We are
now rolling out this technology to help clients
lower their costs of execution.
What’s the biggest mistake that an asset
manager may make in choosing a transition
Cobbett: Well, the most common mistake is
one born of human nature. It’s inertia – just
using the same partner they did last time. But
in terms of the biggest mistake, I’d say it’s
choosing a transition manager like choosing
a roofer for your house. In other words,
obtaining a few bids and going with the lowest
one. But cost forecast shouldn’t be the sole
determinant. A good transition partner offers
meaningful pre-trade analytics (i.e. does not
low-ball estimates to win business), has solid
risk management capabilities, and access to
liquidity. Citi’s global trading platform extends
to trading desks in 77 markets, combined with
technology to bring our clients innovative
execution services. This provides a very
attractive solution for asset owners seeking a
transition manager they can trust.
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“A good transition partner offers meaningful
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