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Sneaking an Elephant Across a Putting Green: a Transition Case Study

Sneaking an Elephant Across a Putting Green: a Transition Case Study

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Published by Wayne H Wagner

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Published by: Wayne H Wagner on May 05, 2009
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07/29/2010

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SNEAKTNG
AN
ELEPHANTACROS
S
A
PIJTTING
GREENi
A
IRANSITION
CASESTUDY
Thiscommentarvdescribes
the
before,duringandpost-mortemprocess
of
what
is
perhaps
the
largestportfoliotransition
ever
executed in
a
concentratedtime
frame.
Thepresentation
was
given
at
the8th Plexus
GroupClient
Conference,
featurinqPlexus' Steven
Glass
moderating,
Paul
Ballard,
ExecutiveAdministrator
of
the
Texas
permanentSchoolFJnd,
and
Alan Rubenfeld,Director
of
Deutsche
Bank
Alex.
Brown,
which
handled
thebulk
ofthe
transition
trading.
BuildingBelterPerformonce
APRIL
2OO2
COMMENTARY
70
ln October2000, the
Texas Permanent
SchoolFund("PSF")exe-cuteda
$17.5
billionportfoliotransition
-
perhaps
the
largest
potl-
folio
transition
ever
executed
in
a
concentrated
time
frame.
Oper"ationally,
ihe
PSF'stransition involved40 assetmanagers,2,200 securities,20+ countries, and500
million shares.
PSF
awarded
afirst
tranche
of
$2.5
billion
toMorgan Stanley
DeanWitter
who executed
the
trades on
an
agency
basis.
Post-
mortemanalysiswas
favorable.
In
earlyJanuary2001,the PSF
solicited
competitive
bids
from
three
transitionmanagementfirms
to
executethe
larger,
far more
difficult
remainder.
Ultimately,the
PSF
selectedahybrid
proposal
from
Deutsche
Bank
underwhich 90%
of
the
portfolio
was
traded on apnncipalbasis andthe
remaining10%
(US
small/midcap
stocks)traded
agency.The totalloss of asset
value
incurred
on
thePSF transitionwas66
bp.
Whilethis compares
very
favorablyagainstPlexus'
Post-
trade
PAEG/L
Benchmark
of
97 bp,Steve cautionedthat trading
is
still
more
art
than
science.
A
better
measure
of the
transition'ssuccess
was
reflected
in
theprocessand structure
of
the PSF's
strategy.
Transitionstypicallypresent plansponsors
with
multiple imple-
mentationalternatives,each
with strengths
and
weaknesses.Assuch,thedevelopmentof aprudenttransitionstrategy
is
oneofchoicesand
trade-offs.
For
the PSFtransition,
the
person
who
made
those
choices
was
Paul Ballard,Executive
Administrator
of
the
PSF.
On
the
Sell-side,
Alan Rubenfeld
coordinatedthethink-ing,
which droveDeutscheBank's biddingandexecution.
StrategicCancerns
PaulBallardbegan by
discussing
his strategicpolicylevel con-
cerns.
Theseissuesrepresented considerations,theresoluttonof
whichwould overlaythe PSF'stactical(execution-oriented)
policies.
They included
[1]
the
need
tominimize
loss of
asset
value,
[2]
the
involvement
of
multiple legacyandtarget managers,[3]
the operationalandadministrativeburdenonthe PSF's
staff,[4]
theinternalpoliticsoftenpresent
in
apublicplan,and
[5]
therecognition
thatPSF
ran arisk of being
viewed
as a"onenight
stand"
with
no
on-going
relationshipto
the
broker.
Paul stressedthat while
the
PSF couldcertainly
have
usedthe$10-15millionor so
in
soft-dollarcredits associatedwithtrading500million shares,
he
was notprepared
to
jeopardizeexecutionefficiency.
Since
the
PSF
was
notpermitted
to
use
futures or
ETF'stomaintainmarket exposure,
he
felt theneed to considerprincipal
bids
and/orfirms capableof executingcomplicateddol-
lar-neutralstrategies.The
fact
that
thetransitioninvolvedmultiplemanagerspresentedseveralconcerns.Variousmanagerswould
bereadyfor
fundingbefore
others.However,
ratherthan
fundingeachmanager
astheycompletedtheir
paperuuork,Paulfelt
thatany advantagesof
funding
the managersptecemealwould
bemore
than
offsetby[1]
tne
cjisruption
io
ongorn$
iirvestmenisiraiegies,
[fi
ieakage
oi
informationregarding
the
large sellportfoliowhichwasfundingthenewmanagers,
[3]
increasedmarket-impactas
multiple
man-agersboughtcommonsecuritiesandsectors,and
[4]
diminished
opportunitiesfor crossing.Consequently,
Paul
decided
to
wait
until
all new managers
were
ready, even
if it
meant delayingtheimolementation
of
thePSF'snew asset
allocation.
Paul
was also
awarethat the
sheer
sizeand
complexity
ofthetransitionwould exacerbatethe normalstrainon
staff
andtransi-tionmanagerresources.
Hetherefore
was
attractedto
the
idea
ofaprincipaltrade,which
would
completeeverythingat
once.
He
alsorecognized theneedto workwith transitionmanagersthathadthe
technology
and
human
resourcesnecessary
to
handle
large
complicatedtransitions
-
andproventrack
records.
Aswith manypublic
plans,
the
PSF
was
not
withoutinternal
poli-
tics.
The factthat thetransitionwouldbeimplemented
in
a
"fish
bowl"environmentonlyheightenedtheneedforprudentstrate-giesandpolicies.As a
neutral
third-partyexpert,
Plexus
enjoyedthe confidenceof
both
trusteesandstaff, and
its
retentionwas
a
keyingredient
in
providingthe necessarycomfortto all
parties.
The
PSF
was concernedthat thesize
of
theirtransition
might
tempt
the
biddingfirms to act
in
ways
that
would
not be
in
the
bestinterest+ of
the
PSF.
While
ihis
is
a
risk
to
buy-side
firms
aswell,
those
firms can
alwaystake
their
business
elsewhere.
Forthe
PSF,
therewouldnot
be
another
time.
To addressthis concern,Paul considered
only
thosefirmswith long andsubstantialtrackrecords
as
transitionmanagers
-
those
who
had"franchise
risk"
if
things
fell
apar1.
He alsofelt
the
need
to
retain
Plexus,
not
onlyfor
its
experlise,
but
topiggybackon
its
ongoing
relationshipswith
brokers
as
a
Transition
Consultant.
While
the
TransitionManagersmight
not
seea
lot
of subsequenttransitionbusiness
from
PSF,Plexusroutinely calleduponthemfortransitionswith
otherplan
sponsors.
In
this
fashion,Paul
Ballard
was
ableto
'rent'
Plexus' continuing
business.
Tactical
Maves
From
a
tacticalexecutionperspective,
the
PSF
faced several
additional
challenges.These
included
[1]
the optimalparsing
of
the transitionportfolioso
as
to minimizecosts,
[2]
identifyingtheTransitionManagement
firms
bestsuited
to
PSF'stransition,
[3]
structuring
the bidding
process
so
as to
encourageaggresslve
bids
thusminimizing
leakageof
information,and
[4]evaluating

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