Moving Assets Between Managers Costs Funds $21 Billion
Pensions & Investments (10/01) Vol. 29, No. 20 p.3; Clair, Chris

According to a study conducted by Frank Russell Co., portfolio transition management services have cost pension funds about $21 billion more than expected by analysts in 1998, which means that the average pension paid 99 basis points more for transition management services than initially expected. The study revealed that performance slippage--when returns are lost because assets are not moved as efficiently as possible--was the main cause of inflated costs when pensions moved about $2.2 trillion. Generally, transition managers use benchmarks based on daily closing prices in order to project what the transition will cost; if the transition is made below the benchmark, the manager obtains additional fees. Transition managers often manipulate this system by selling shares throughout one trading day, and before the market closes, the manager unloads the remaining bulk of the shares. Other transition problems include crossing--in which managers sell shares within their own index--exposing the fund to cash while waiting to purchase the stocks desired, causing the fund to lose potential returns during the waiting period.

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