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Optimizing Outcomes for Portfolio Transitions

As portfolio allocations change and market volatility increases, institutional investors benefit from working with the right transition management partner to optimize outcomes.

There are multiple factors today that impact institutional investors and their portfolio allocation decisions. Some of these may drive an organization to make significant changes to their portfolio. For example, a move to Environment, Social and Governance (ESG) investing or a desire to consolidate pension plans in order to reduce costs and gain scale may prompt institutional investors to overhaul their portfolio allocations.

However, in an uncertain environment, time and expertise are crucial components to making significant changes. Working with a transition management partner is key to a successful outcome.

The Rise of ESG Investing

Perhaps one of the most notable investment trends in recent years is the rise of ESG investing. Driven by a heightened awareness of social issues and the global pandemic, asset owners and managers are reinforcing their commitment to ESG investments.

In Europe, institutional investors have long made ESG a focus of their investing strategies. This has stepped up as governments enact new regulations and countries push to meet targets of the Paris Agreement.

In the U.S., ESG investing has gained considerable traction due in large part to investors putting greater emphasis on sustainable investing. And while regulation is not yet driving ESG investing in the U.S., that could change if regulatory bodies in the U.S. decide to put forth formalized ESG policies. The U.S. Securities and Exchange Commission has named ESG as a focus, signaling regulations could emerge in the coming years. 

If an institutional investor decides to overhaul a portfolio to align with newly set ESG goals, the transition could be a large-scale undertaking. In this case, asset owners benefit from the expertise of a transition manager.  And since adherence to ESG policies is a priority, investors should seek out an organization with the following:

  • Focus on transparency and integrity
  • Solid track record of risk aversion and ethical behavior
  • Commitment to diversity, equity and inclusion
  • Strong corporate governance, internal audit and counterparty review
  • For clients domiciled in the U.S., seek a provider serving as a co-fiduciary, compliant with ERISA

Plan pooling and consolidation

The trend toward plan consolidation and fund pooling continues to gain traction as public pension plans  and healthcare systems around the globe seek ways to reduce costs, gain scale and increase efficiencies.

In Australia, the $2.4 trillion superannuation sector is merging, driven by pressure from the Australian Prudential Regulation Authority. i There were a record 15 mergers in the year to October 2021, with a number of ‘super funds’ building considerable power.

In the UK, the occupational defined contribution (DC) pension market has consolidated by nearly 40% in a decade, according to The Pensions Regulator (TPR). ii On the defined benefit (DB) side, significant consolidation took place in 2018, when local government pension funds pooled their assets. iii iv Over 80 local authority pension funds within the UK Local Government Pension Scheme (LGPS) in England and Wales, which now have combined assets under management of more than £276 billion v, created eight separate pools, and are expected to consolidate even further, reducing from eight to three by 2030. vi

In the Middle East sovereign wealth space, merger announcements include Oman Investment Fund (OIF) and State General Reserve Fund (SGRF), coming together to create fund with expected assets of approximately $18 billion, vii viii Abu Dhabi Investment Council (ADIC) becoming part of the Mubadala group with a combined portfolio worth over $200 billion, ix and Saudi Arabia’s merger of two of its pension and insurance funds to create a new entity with over $250 billion in assets under management. x

For continental Europe, consolidation has been a key trend for some decades. Over the two decades to 2018, the number of pension schemes in the Netherlands decreased by 75% over the period, for example. xi

The trend is also driving change in North America. 72% of Canadian pension funds have said that they’re considering consolidation options that offer greater certainty that they’ll be able to meet their liabilities. xii And in the US, the state of Illinois enacted the Pension Consolidation Act in 2020, designed to consolidate police and fire pension plans to increase investment returns and decrease fees. xiii

And in the U.S. healthcare sector, a recent increase in merger and acquisition activity has led to additional consolidation. From 2016 to 2018, there was a substantial increase in health system consolidation, with 52 target systems collectively consisting of 178 hospitals and 14,533 physicians merged or acquired by 41 acquirers. xiv

Pension funds and healthcare systems that pool or consolidate assets and change investment strategies as a result will find themselves in need of an organized portfolio transition manager to guide the process. There are many advantages to this approach.

  • Transition managers add project management expertise, ensuring coordination between legacy and target investment managers, custodians and trade desks, saving the pension fund time and energy.
  • Transition managers can act in coordination with the custodian to execute transitions as assets move, to migrate from legacy to target real time.
  • Transition managers can also bridge the gap between the previous investment strategy and the new.  Options include utilization of ETFs, optimized index replication or futures to maintain market exposure against a benchmark and ensure the portfolio remains invested in the interim.

Impact of Market Volatility

While certainly not a trend, market volatility is a factor to consider in any portfolio transition. From political unrest, to economic uncertainty and continuing COVID concerns, market volatility can wreak havoc on investment portfolios.

When the COVID Delta variant first appeared in July 2021, the Dow Jones Industrial average closed down 725 points in one day. The S&P 500 lost 1.6% and the Nasdaq Composite declined 1.1%. xv A similar scenario happened when Omicron variant fears caused the Dow Jones to drop more than 433 points in December 2021.  The S&P 500 fell 3.01% and the Nasdaq dropped 3.76% over three days during the month of December. xvi

The prospect of a U.S. Fed rate hike in 2022 has created additional stock market volatility, with mere mention of 50-basis point hikes in January enough to send the stock market into upheaval. xvii Rate hikes aren’t limited to the U.S. In early February, the Bank of England imposed back-to-back interest rate hikes, xviii with more shifts in policy a possibility.  

In an uncertain environment, particularly when investors need to act quickly due to increased volatility, having a seasoned transition manager at the ready is crucial to be sure that execution is handled in an expert manner and that risk is managed properly.

Navigating Through the Complexity

The portfolio allocation decisions that institutional investors make are always changing, as recent trends show. Some of these decisions may mean major investment strategy shifts. Transition management is a key service to manage the process and the inherent risk of such a big change. An experienced transition specialist can help navigate risk, complexity and market volatility to make the process run more smoothly and effectively.

To learn more about Northern Trust Transition Management, reach out here.

 


i https://www.ft.com/content/932133d5-5f3c-4714-b881-3022f0a081af
ii https://www.actuarialpost.co.uk/article/dc-pension-market-consolidation-continues-20462.htm
iii https://mycouncil.surreycc.gov.uk/documents/s73145/14%20-%20Annual%20Report%202019-20%20-%20Annexe%201.pdf
iv http://www.lgpsboard.org/index.php/schemedata/scheme-annual-report
v https://lgpsboard.org/index.php/schemedata/scheme-annual-report
vi https://www.lgcplus.com/investment/lgps-pools-expected-to-further-consolidate-18-07-2019/
vii https://www.forbes.com/sites/dominicdudley/2020/06/05/oman-sovereign-wealth-fund/?sh=6ada84b52dc2
viii https://home.kpmg/xx/en/home/insights/2019/05/consolidation-of-swfs-and-pensions.html
ix https://www.cnbc.com/2018/03/21/adic-to-join-mubadala-group-as-wealthy-abu-dhabi-consolidates-funds.html
x https://www.bloomberg.com/news/articles/2021-06-20/new-giant-saudi-pension-fund-aims-to-crack-world-s-top-10-ranks
xi https://www.ipe.com/pension-consolidation-is-it-all-good-news/10023898.article
xii https://www.benefitscanada.com/news/cir-news-news/72-of-canadian-pension-funds-consdering-consolidation-options-survey/

xiii https://www.marquetteassociates.com/wp-content/uploads/2020/01/Illinois-Legislative-Update-2020-Police-and-Fire-Pension-Consolidation.pdf
xiv https://www.healthaffairs.org/doi/10.1377/hlthaff.2020.00017, August, 2020
xv https://www.theguardian.com/business/2021/jul/19/us-stock-markets-investors-delta-variant-coronavirus, July 21, 2021
xvi https://www.cnbc.com/2021/12/19/stock-market-futures-open-to-close-news.html; December 19, 2021
xvii https://www.cnbc.com/2022/02/06/what-fear-of-50-basis-point-fed-rate-hike-says-for-market-volatility.html, February 6, 2022 
xviii https://www.cnbc.com/2022/02/03/bank-of-england-hikes-rates-in-first-back-to-back-rise-since-2004.html, February 3, 2022

 


NORTHERN TRUST CAPITAL MARKETS is comprised of a number of Northern Trust entities that provide trading and execution services on behalf of institutional clients, including foreign exchange, institutional brokerage, securities finance and transition management services. Northern Trust Global Services SE (‘NTGS SE’) provides Institutional Brokerage, Securities Finance, Foreign Exchange and Transition Management services in the EU and EEA. Northern Trust Investor Services Limited (‘NTISL’) provides Transition Management services in the UK, and subject to local regulation, other EMEA jurisdictions on a cross-border basis. Northern Trust Securities LLP (‘NTS LLP’) provides Institutional Brokerage services in the UK and Australia, and subject to local regulation, other EMEA and APAC jurisdictions on a cross-border basis. The Northern Trust Company (‘TNTC’) provides Foreign Exchange, Securities Finance and Transition Management services in the UK, and subject to local regulation, other EMEA jurisdictions on a cross-border basis. Please refer to your Northern Trust terms of business for details of the relevant Northern Trust entity for the services you receive.

© 2022 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability as an Illinois corporation under number 0014019. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. This material is directed to professional clients only and is not intended for retail clients. For Asia-Pacific markets, it is directed to expert, institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. For legal and regulatory information about our offices and legal entities, visit northerntrust.com/disclosures. The following information is provided to comply with local disclosure requirements: The Northern Trust Company, London Branch, Northern Trust Global Investments Limited, Northern Trust Securities LLP and Northern Trust Investor Services Limited, 50 Bank Street, London E14 5NT. Northern Trust Global Services SE, 10 rue du Château d’Eau, L-3364 Leudelange, Grand-Duché de Luxembourg, incorporated with limited liability in Luxembourg at the RCS under number B232281; Northern Trust Global Services SE UK Branch, 50 Bank Street, London E14 5NT; Northern Trust Global Services SE Sweden Bankfilial, Ingmar Bergmans gata 4, 1st Floor, 114 34 Stockholm, Sweden; Northern Trust Global Services SE Netherlands Branch, Viñoly 7th floor, Claude Debussylaan 18 A, 1082 MD Amsterdam; Northern Trust Global Services SE Abu Dhabi Branch, registration Number 000000519 licenced by ADGM under FSRA # 160018; Northern Trust Global Services SE Norway Branch, 3rd Floor, Haakon VII's Gate 6, 0161 Oslo, Norway; Northern Trust Global Services SE, Leudelange, Luxembourg, Zweigniederlassung Basel is a branch of Northern Trust Global Services SE (itself authorised by the ECB and subject to the prudential supervision of the ECB and the CSSF). The Branch has its registered office at Aeschenplatz 6, 4052, Basel, Switzerland, and is authorised and regulated by the Swiss Financial Market Supervisory Authority FINMA. The Northern Trust Company Saudi Arabia, PO Box 7508, Level 20, Kingdom Tower, Al Urubah Road, Olaya District, Riyadh, Kingdom of Saudi Arabia 11214-9597, a Saudi Joint Stock Company – Capital 52 million SAR. Regulated and Authorised by the Capital Market Authority License # 12163-26 CR 1010366439. Northern Trust (Guernsey) Limited (2651)/Northern Trust Fiduciary Services (Guernsey) Limited (29806)/Northern Trust International Fund Administration Services (Guernsey) Limited (15532) Registered Office: Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3DA. Northern Trust International Fund Administration Services (Ireland) Limited (160579) / Northern Trust Fiduciary Services (Ireland) Limited (161386),  Registered Office: Georges Court, 54-62 Townsend Street, Dublin 2, D02 R156, Ireland.

IMPORTANT INFORMATION: For Use with Institutional Investors/Financial Professionals Only. Not For Retail Use.

Securities products and services are sold by Registered Representatives of Northern Trust Securities, Inc. (member FINRA, SIPC),a wholly owned subsidiary of Northern Trust Corporation.

The information contained herein is intended for use with current or prospective clients of Northern Trust Investments, Inc. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Northern Trust and its affiliates may have positions in and may affect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor. Opinions and forecasts discussed are those of the author, do not necessarily reflect the views of Northern Trust and are subject to change without notice.

This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice.

Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.

All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, adviser risk and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe Northern Trust’s efforts to monitor and manage risk but does not imply low risk.

Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Belvedere Advisors LLC and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.

© 2022 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A.

Craig Blackbourn

EMEA Head of Transition Management
Craig Blackbourn is a Senior Vice President and EMEA Head of Transition Management. Craig is charged with the long-term strategy of the group, client management and day-to-day operations.

© 2022 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability as an Illinois corporation under number 0014019. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. This material is directed to professional clients only and is not intended for retail clients. For Asia-Pacific markets, it is directed to expert, institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. For legal and regulatory information about our offices and legal entities, visit northerntrust.com/disclosures. The following information is provided to comply with local disclosure requirements: The Northern Trust Company, London Branch, Northern Trust Global Investments Limited, Northern Trust Securities LLP and Northern Trust Investor Services Limited, 50 Bank Street, London E14 5NT. Northern Trust Global Services SE, 10 rue du Château d’Eau, L-3364 Leudelange, Grand-Duché de Luxembourg, incorporated with limited liability in Luxembourg at the RCS under number B232281; Northern Trust Global Services SE UK Branch, 50 Bank Street, London E14 5NT; Northern Trust Global Services SE Sweden Bankfilial, Ingmar Bergmans gata 4, 1st Floor, 114 34 Stockholm, Sweden; Northern Trust Global Services SE Netherlands Branch, Viñoly 7th floor, Claude Debussylaan 18 A, 1082 MD Amsterdam; Northern Trust Global Services SE Abu Dhabi Branch, registration Number 000000519 licenced by ADGM under FSRA #160018; Northern Trust Global Services SE Norway Branch, 3rd Floor, Haakon VII's Gate 6, 0161 Oslo, Norway; Northern Trust Global Services SE, Leudelange, Luxembourg, Zweigniederlassung Basel is a branch of Northern Trust Global Services SE (itself authorised by the ECB and subject to the prudential supervision of the ECB and the CSSF). The Branch has its registered office at Grosspeter Tower, Grosspeteranlage 29, 4052 Basel, Switzerland, and is authorised and regulated by the Swiss Financial Market Supervisory Authority FINMA. The Northern Trust Company Saudi Arabia, PO Box 7508, Level 20, Kingdom Tower, Al Urubah Road, Olaya District, Riyadh, Kingdom of Saudi Arabia 11214-9597, a Saudi Joint Stock Company – capital 52 million SAR. Regulated and Authorised by the Capital Market Authority License #12163-26 CR 1010366439. Northern Trust (Guernsey) Limited (2651)/Northern Trust Fiduciary Services (Guernsey) Limited (29806)/Northern Trust International Fund Administration Services (Guernsey) Limited (15532) Registered Office: Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3DA. Northern Trust International Fund Administration Services (Ireland) Limited (160579)/Northern Trust Fiduciary Services (Ireland) Limited (161386),  Registered Office: Georges Court, 54-62 Townsend Street, Dublin 2, D02 R156, Ireland.