Dr Jaco Maritz, Cadiz Securities

Dr Jaco Maritz, Cadiz Securities

Transition Management – what is it?
Common pitfalls
How to keep it clean

Four questions:
1. What is a transition?
2. Do you need a transition manager?
3. How do I select a transition manager?
4. How do I know the job was done correctly?

Initial Portfolio
Target Portfolio
Sell
Buy
Common assets (“in
kind”)

Specialised transition
management is…
the professional management of
trading out of an initial portfolio
and into new target portfolio
by maximising in-kind transfer to
save cost and trading impact
while controlling for …
– The specialised risks
during the transition
– the synchronising of the
trades,
– upfront and hidden costs
Project management and risk management are key ingredients

Minimal loss of performance
– Low cost
– Always invested in the market
– Track performance of the new portfolio
Minimal break in the fund’s operations
No break in fund’s financial records
No assets lost in the process
No chaos and no stress!
It does not happened by itself!

Pre-transition Transition Trading Post-transition
Financial Risk
Operational Risk
Operational Risk
Operational Risk

Pre-transition Transition Trading Post-transition
Proposed change to
investments
Selection process
Implementation of
trading plan
Risk Management
Due diligence or Trade execution
Request for
Proposal
Source liquidity
Quotation
Service level agreement
Pre-transition analysis
Termination of mandates
Appointment of
custodian
– Crossing
Settlements
Cash management
Valuation
Reporting
Delivery of portfolios
Post-transition report
Financial reporting
Closure of accounts

The global standard is a measure called implementation shortfall
It is the difference between:
Millions
7,500
7,400
a notional portfolio transitioned instantaneously to the
target portfolio with zero costs
Portfolio value [R]
7,300
7,200
7,100
7,000
Implementation shortfall
…..and the transitioned portfolio with all costs included.
6,900
6,800
Initial 19-Mar 20-Mar 23-Mar 24-Mar 25-Mar 26-Mar 27-Mar
Actual Portfolio
Paper Portfolio

Clients tend to focus on commissions...
often to their own detriment!
11%
10%
53%
10%
16% Commissions
Estimated market
impact
Bid-offer spreads
Missed trades
Opportunity costs

( )
2
2 2
2
Tracking
= β − β ) σ + σ
error to target
This is quadratic
-The larger the beta differential is allowed to drift
-The further your fund is up the steep section of the
parabola!
(
source target target residual to target
1.1
8%
1.0
0.9
Managing this beta
differential is central!
Can be exacerbated by the
market moving during the
transition
7%
6%
5%
Beta
0.8
0.7
Translates into this large risk
(tracking error)
Target Beta = 0.793
4%
3%
Tracking Error
2%
0.6
1%
0.5
0%
Initial
19-Jan
20-Jan
21-Jan
24-Jan
25-Jan
26-Jan
27-Jan
28-Jan
31-Jan
Beta
Tracking Error

10.0
9.0
Tracking Error Variance
8.0
7.0
6.0
5.0
4.0
3.0
Initial Risk
One needs to target getting
off the steep section of the
parabola asap!
Massive
risk
reduction
2.0
1.0
0.0
Now, if the market moves, the
potential shortfall is small
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0
Target Beta

What protection do you have?
– Regulator does not police transition managers per se
– Varying business models / service models

Does your transition manager have a well
considered financial risk management strategy?
Is the trading plan optimised to reduce risk?
Do they have quantitative specialists that look at
the financial risks?
Does your transition manager manage the
financial risk in real-time? - systems?

Project plan/time line
Quantitative analysis of initial and target
portfolios
Analysis of trade lists – liquidity, risks, trading
plan
Cost estimate
Estimate of implementation shortfall (range)

Comparison against pre-transition report
Was the plan executed as stated?
Cost/fee disclosure
– Comparison against estimate
Risk management – was it effective
Implementation shortfall attribution
– VWAP is inappropriate

Where does the transition management business
fit within their organisation?
– Bank
– Brokerage
– Asset consultant
– Asset manager
What is their business model?
– Trading outsourced?