Best Practices

How to Build an Effective Transition Management Pool

How to Build an Effective Transition Management Pool
3 min 54 sec

Transition management is the cost-effective and efficient restructuring of institutional portfolios from single or multiple investment managers/asset classes to a new allocation over a short-term horizon, with risk management at the core of the process. Transition managers are the discretionary caretakers of the transition event, employing expertise in the fields of project management, trade and execution, and risk mitigation.

In this blog post, we offer guidance on building a pre-selected pool of transition managers, drawing on my recently published paper (“Building a Pool of Transition Managers: Both an Art and a Science”) and lessons from our decades of experience in this specialized and highly important area.

A pre-selected, pre-contracted pool of providers is imperative:

  • It empowers the fund sponsor to huddle, brainstorm, and solicit ideas from multiple perspectives on pre-trade strategies to manage the transition event.
  • It creates a virtual ring fence around information leakage because the managers operate under nondisclosure agreements.
  • It serves to counter biases to vet out the efficacy of any recommended strategy.
  • It operates as a cross-check on quoted fees and costs to manage low-ball bids, or for that matter a dampening lid on pricey strategies.
  • It is an effective tool to triangulate on a well-articulated strategy and to decipher the range of potential outcomes, including costs.

To build the pool, we recommend using these “check points” as a guide in developing the right roster of transition managers:

  • Core Exposure Allocation: Many clients have an anchor portfolio, comprised of an index (passive) core allocation and often used for liquidity purposes. If an index manager has transition management capabilities, it deserves consideration in a panel.
  • Fixed Income Capabilities: The inherent principal construct and underlying challenges within fixed income necessitates the need to engage a fixed income specialist in a transition pool. Oftentimes, the underlying fixed income manager within a client investment structure has transition management capabilities. A crucial capability in fixed income transitions is the ability to deploy solutions for bank loans and large amounts of credit securities.
  • Liquidity-Constrained Dimension: Within liquidity-constrained spaces, a transition specialist in mid-, small, and micro-cap, including non-U.S. equities (both emerging and frontier), and currencies is imperative. The global infrastructure (e.g., trading and operations desks) of a transition manager in this area cannot be ignored.
  • Custody-Related Discipline: Custodian banks have developed operational discipline and depth of capabilities in transition management, and they deserve consideration within a transition management pool. They are often critical in markets involving specialized requirements as well as minimizing headaches for those transitions requiring extensive documentation.
  • Multi-Asset Class Factor: Based on our experience, a majority of transitions are initiated as an offshoot of multi-asset class allocation rebalancing. This forces the transition manager to have investment discretion and portfolio management capabilities to handle a multi-asset class transition, and Callan recommends a transition manager with multi-asset class capabilities, specifically equities and fixed income. Any analysis conducted on a multi-asset class transition requires a robust, integrated multi-asset class platform that normalizes the impact and friction of equities, fixed income, cash, currencies, etc., for analytical purposes.
  • Hybrid Solution: Callan believes in the agent model for transitions because it leads to better disclosure and transparency, and helps avoid self-dealing. However, there are instances in which a principal or hybrid solution (a combination of agent and principal) is necessary and probably the only solution for a quick exit. A transition manager with a hybrid solution is able to manage unwinding long-short portfolios, divestment considerations (e.g., liquidating securities related to guns and ammunition manufacturers), non-tradable odd-lots, defaulted securities, and other sticky transactions.
  • Non-Systemic Requirements: Clients are subject to a myriad of requirements and governance principles, forcing a growing subset of transition mandates to evolve over time. For example, the implementation of environmental, social, and governance (ESG) policies and engagement of diverse business enterprises by public funds resulted in the growth of capabilities beyond the traditional definition of transition management. Another area within this space is the ability to execute tax-loss harvesting for the tax-managed portfolios of high-net worth trusts and individuals. Tax-aware transition management is also required for nuclear decommissioning trusts in the United States with both tax-exempt and taxable pools of assets.


As the portfolios of fund sponsors become more complex, greater demands will be placed on transition managers, and it is critical that fund sponsors evaluate potential managers across a range of issues.

Callan recommends that fund sponsors evaluate transition managers before they need them, and build a pool of them to be prepared when a transition event occurs. Success comes to those who are prepared.

To learn more about this topic, please see my paper, linked here. For any questions about our services in this area, please feel free to reach out to our Trust, Custody, and Securities Lending group at [email protected].

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