In an environment where transition management has come under the microscope from regulators and providers have been exiting the business (most recently BNY Mellon and J.P. Morgan), Northern Trust has remained committed to the business. Over the last five years, the bank has recorded volume growth of more than 50% in its global transition management business. Grant Johnsey, Northern Trust’s head of transition management in North America, has been in the business for nearly a decade at Northern Trust, starting as a transition strategist for North American Clients. Despite the increased scrutiny on transition management, Johnsey says that he sees continued growth opportunities.
GC: What do you think has caused Northern Trust’s growth in transition management over the last 5 years?
GJ: There are a number of relatively broad trends that are out there that are driving that growth, both in terms of a five-year rolling history as well as our growth on a year-over-year basis, which was 9.3% last year. Much of it is the way that institutional asset owners are going about managing and investing their portfolios. I think the first big shift that we’ve seen that usually entails a rather large transition is a shift of matching assets and liabilities. So that shift would be where they would hire a liability-driven investment manager or a series of managing investment managers to match their assets with their liabilities, which has been particularly common for defined benefit plans, particularly on the corporate pension side.
The second area of growth we’re seeing is, broadly speaking, in the defined contribution world. There are a few key drivers there. The first is with the shift to more defined contribution plans away from or in addition to defined benefit plans, there’s been more focus on the investment mix in DC plans. So you’re seeing some transition result from that focus. It could be putting in managers that are performing better, it could be diversifying the mix of assets available to participants. We’ve also seen scenarios of going to target dated funds or pooled type funds—sometimes those are one and the same.
Another area that we’re seeing is a move towards the outsourcing of investments—what you would typically see referred to in the marketplace as an outsourced CIO program. When that happens, obviously there’s going to be quite a few changes that would take place when the new outsourced CIO comes on board. It’s not unusual to see relatively large changes across the board in the assets of that particular plan or client. We have seen over the last several years, broadly speaking, some de-risking going on. It’s picked up a bit of late, where with the run that the equity markets have had, some institutional investors have pulled some money out of equities and put them into less volatile asset classes—in many cases fixed income and sometimes lower beta alternative type strategies. So we’re seeing a bit of that, which was quite common in ’09 and ’10 in response to volatility in the financial marketplace and has become more common in the last six to twelve months.
We’re still seeing a general growth in fund of fund manager transitions. These would be either an investment advisor who uses a series of sub-advisors to manage their funds, or it could also be a variable annuity type program that an insurance company is running. Traditionally, there has been always some transition management by these types of clients, but we’re seeing that increase some. Where some of these fund of fund managers might have done the transition themselves in-house, we’ve seen a trend, at least in our business, towards helping out with their moves. And I think the reason for that trend is a lot of fund of fund managers, a lot of variable annuity companies, are very sophisticated investors. They can do this work themselves, which they do in some instances. But what I think a lot of folks have realized is that because this business is relatively complex and because we’re not charging any additional fees, it has become a way for them to outsource some of the operational work and risk off of their team onto someone else who does this full time for their living.
Over the years, transition management activity has gotten a lot more complex. The general trend has been towards these multi-asset, multi-manager transitions that represent more than half our total transition activity now. We’re seeing as part of that, a lot more parebacks of existing managers, meaning a reduction of asset value from one fund manager and redeployment of those assets to others.
The last growth trend, and this is a very broad one, is we’re still seeing a lot of activities within the global equity space, particularly for North American investors. There has been a general trend over many years now to diversify those assets (by moving from U.S. equity markets, for example, to developing and emerging markets).
GC: What do you think has caused the recent drop in the number of providers of transition management?
GJ: It’s several factors. One is this is still a relatively young business. It is developing, and it’s growing, and it’s maturing, and when you see those things happen you’re going to see in various spots some consolidation in the industry. Transition management has probably been around for 25 years in some form or fashion. Twenty-five years ago, it was predominantly a facilitation of liquidations. Fifteen-to-twenty years ago, it was primarily a facilitation of one to one manager changes—selling one manager, buying the other. If you go back the last five-to-ten years, it’s been much more complex with the multi-asset, multi-manager transitions. You’re going to see consolidation in nearly any industry as it goes through growth where you have a number of players. In the early stages, some of them decide that this is not for them, and the business consolidates. So I think that’s part of it. I think in the case of transition management in particular, there is a very high need for experience. You have to invest a lot in the business because you have to be so broad and so deep.
GC: How have you adjusted to calls for more transparency in the transition management industry?
GJ: Twelve-to-fifteen years ago, the market was very much bifurcated at that time between the agency players, we’ll call them the fiduciary players, that were doing this as investment advisors, that were doing it on a transparent basis trading all securities as agent. On the other side of the spectrum, you had providers doing it from more of an investment banking standpoint that were committing capital to the trades, giving guaranteed market on close, and those investment bank players have by and large left the space. I’ve been at Northern Trust coming up on 10 years, and we have always done our business on an agency basis, even for fixed income. It’s something that we’ve always felt is important. That approach obviously in this market has served us well and is something that we continue to do, so we have not really had an impact from this. I would say the one impact we have seen over the years is on the FX side. The FX business doesn’t have the same market structure to be able to apply commission effectively; that business by and large over the years has been going to a more transparent basis where the counterparties are disclosed, the commissions—if any at all—are disclosed to the client, and we do a lot of trading in the FX market on an unaffiliated basis. Ultimately what it comes down to, for all asset classes, is revenue disclosure. At the end of the trade, it’s about the ability to come back to the client and say, “Across all the trading we did, across all the transition we did, here is the total revenue that we, Northern Trust, earned.” We tell our clients that if you really want granularity and transparency, just ask for attestation of revenue generation at the end of a trade.
GC: Where do you see the business evolving from here?
GJ: There’s two things that we’re seeing some of now that I think will continue to grow and evolve. The first is the ability to take on internal investment management. If you think about the way the transition management business has moved, the players that are left are predominantly investment managers. They will take on a role as an investment advisor, and the reason that’s important is not only the approach of an investment advisor for transparency, but also the fact that as an investment advisor we handle corporate actions processing, and we do proxy voting in line with whatever the guidelines are that we set with the client. So we basically take a holistic approach bridging the gap between any legacy investment managers and the target investment managers, and that’s the reason the business has gone like that. Not only because of the revenue and the alignment of interest, but also because of the services an investment manger can provide. If you think about transition, you’re an interim investment manager. But a trend we have seen is actually taking that a step further where we’ll actually be appointed as an asset manager on a longer basis than just doing or facilitating trading activity. We’ll actually manage assets for typically under a year, and somewhere between a few weeks up to six months on average. And the scenarios where that would occur would be an emergency scenario; for example, where a fund manager has a lift out of their team, or a key person leaves. Another would be something happening in the market on a macro level. It could be an investment opportunity or it could be a change in the global macroeconomic environment where an asset owners says, “I don’t like the assets we have right now, I don’t like the risk or exposure, and we have to make a quick change. We don’t have time to go through an RFP, I don’t want to take on the management in-house and we need someone to step in there on a temporary basis.”
The other trend is similar but slightly different. We see more inquiries to actually be working with a fund of fund manager on a daily basis to where we’re already set up for a fund of fund account and can help jump in and manage assets for them as well. So it’s having a structure in place for a fund to be able to facilitate some sort of trading for them without having to go through a complex transition process.
GC Friday Interview: Grant Johnsey, Head of Transition Management in North America, Northern Trust
In an environment where transition management has come under the microscope from regulators and providers have been exiting the business (most recently BNY Mellon and J.P. Morgan), Northern Trust has remained committed to the business. Over the last five years, the bank has recorded volume growth of more than 50% in its global transition management business. Grant Johnsey, Northern Trust’s head of transition management in North America, says that he sees continued growth opportunities despite the increased scrutiny.