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August 4, 2014
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THE INTERNATIONAL NEWSPAPER OF MONEY MANAGEMENT
Asset Servicing
Firms turning to overlays for transition management
Money managers using strategy more nimble than selling securities
By RICK BAERT
Overlay
manager
Parametric
Clifton,
The changing landscape in transition man-
Minneapolis, has added $3.4 billion in institu-
agement and the desire for increased returns
tional client assets since Jan. 1, raising its total
on cash have generated new interest in a long-
assets under management to $46.5 billion as of
time offering — overlays.
June 30, said Jack Hansen, chief investment
As transition managers like Bank of New
officer. And while Parametric Clifton does not
York Mellon Corp., Credit Suisse and J.P
break out how much of its assets are managed
Morgan Chase & Co. have left the business, two
for transitions, Mr. Hansen said there’s “a con-
money managers — Parametric Clifton and
stant amount subject to them.”
Russell Investments — have stepped in to pro-
For Russell Investments, “there are more
vide overlays as a way to move assets other
inquiries about overlays regarding alternative
than through traditional securities sales.
investments consistent with the growing
That use has dovetailed with the desire by
demand for alternative investments,” said
asset owners to be more nimble and find
Travis Bagley, director of transition manage-
excess return on cash, two things historically
offered through overlays but finding new interest today in a zero-rate environment for cash.
COUNTING ON IT: Jack Hansen said his
firm is expecting to see more business
from funds using outsourced CIOs.
“There are new things that are happening,”
said Ross McLellan, founder and president of asset servicing ana-
ment, North America in Seattle. “It’s been interesting to watch.”
Russell managed $45.7 billion in overlay
strategies as of Dec. 31, according to Pensions &
Investments data.
lytics provider Harbor Analytics, Hingham, Mass., which studies
Mr. Hansen said the exit of the three banks from transition man-
transition management. “Pension funds have become a lot more
agement in the past 18 months has created opportunities for
complex. … Overlays can provide a quick way to help rebalance,
Parametric Clifton, and he expects even more business from pen-
plus it can provide exposure to more esoteric asset classes, and
sion funds and other asset owners moving to outsourced CIO
they can get you that (exposure) synthetically more quickly than a
arrangements. With outsourced CIOs, investment changes can be
traditional transition manager. Pension funds are seeing this and
made more quickly than through traditional board decision-mak-
want to take advantage.”
ing process and they can use overlays to make more complex tran-
Added Brian Roberts, senior consultant, NEPC LLC, Boston: “If
sitions more quickly while still retaining liquidity, Mr. Hansen said.
one considers the outlook for equity and fixed-income returns
“We’re in transition management from an exposure standpoint,”
going forward, in addition to cash earning essentially zero, pension
Mr. Hansen said. “Traditional transition managers are called infre-
funds are looking for ways to improve the efficiency and perform-
quently, usually just for larger traditional transactions like buying
ance of their plan without sacrificing the liquidity needed to meet
and selling securities. We do more ‘exposure management’ for all
benefit payments.”
sorts of transitions that are made all the time.” Examples Mr.
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August 4, 2014
Hansen gave include real estate investments, policy target alloca-
The $60 billion Massachusetts Pension Reserves Investment
tionchanges, rebalancing, changes in commodity investments, and
Management Board, Boston, in 2013 hired Parametric Clifton to
moves to direct hedge funds from funds of funds.
manage an overlay for its $1 billion average cash holdings. Michael
Trotsky, executive director and CIO, said that while MassPRIM
‘Duopoly’ among managers
doesn’t use overlays for transitions or rebalancing, the concept
Russell and Parametric Clifton have a “duopoly” among man-
is intriguing.
agers that apply overlays to transitions and rebalancing, said
Harbor’s Mr. McLellan, as both have a long history in overlays and
can comply with the derivatives rules of the Dodd-Frank Wall
Street Reform and Consumer Protection Act.
‘Very effective way’
“Overlays, in either transition management or rebalancing, are a
very effective way to gain exposures to securities in a very timely
“It’s a more complex world today,” said Mr. McLellan. “Several
manner,” Mr. Trotsky said. “We now rebalance quarterly, but if we
years ago, anyone could do an overlay. But since the (2008-‘09)
rebalance more frequently, (overlays) would be a very cost-effec-
financial crisis and Dodd-Frank, overlays have a lot more capital
tive way of doing that.”
rules and regulations. It’s a completely more complex industry
MassPRIM taps its pool of seven transition managers rarely,
than in the past, and overlay managers need the scale to do this.
“only when we terminate a manager and are redeploying the
Parametric Clifton and Russell are the stalwarts.”
assets,” Mr. Trotsky said. “Transition managers do that in low-
Russell’s Mr. Bagley said combining overlays and transition
cost ways with existing managers to keep the securities with-
management is a good selling point for Russell. “We have expert-
out taking on more transaction costs. Theoretically we could
ise in physical trading and derivatives trading, and can look at a
use overlays.”
number of options for an optimal solution. That puts us in a posi-
While Parametric Clifton has been able to gain business without
tion to find out what works best,” he said. Neither Mr. Bagley nor
offering overall transition management services, Harbor Analytics’
Tom Fletcher, managing director, overlay services, at Russell would
Mr. McLellan said that probably won’t be the case for long. “I
identify clients that use overlays in such ways.
expect Parametric Clifton to have some sort of transition manage-
The $2.1 billion Seattle City Employees Retirement System
ment affiliation, whether partnering with another firm or building
hired Russell in late 2013 as a cash overlay manager. At the time of
their own business, within the next 12 months,” he said.
the hiring, Anthony Smith, investment strategic adviser at the pen-
“Transitions are such an important part of overlays; you really
sion fund, said the overlay would be used for rebalancing as well
need to provide that (transition management) service.”
as for equitizing excess cash (P&I, Dec. 23). Efforts to reach Mr.
“That’s been talked about here,” said Mr. Hansen of adding tran-
Smith and Kenneth Nakatsu, interim executive director, for further
sition management capabilities. “I wouldn’t rule it out, but there
comment were unsuccessful.
aren’t any plans to do this right now.”
䡲
Parametric Portfolio Associates LLC (“Parametric”) is registered as an investment adviser under the U.S. Securities and Exchange
Commission Investment Advisers Act of 1940. Parametric Clifton is the institutional business unit of Parametric, comprised of applicable sales and client services personnel across Parametric’s Seattle, Minneapolis and Westport investment centers. This material is
for informational purposes only. Opinions and suggestions offered are subject to change without notice, as are statements of financial market trends which are based on current market conditions. Parametric believes this information is reliable but cannot guarantee its accuracy. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The
views and strategies described may not be suitable for all investors and may not be applicable to all investment portfolios or strategies. Parametric does not provide legal, tax and/or accounting advice. Investors should consult with their own tax or legal advisors
prior to entering into any transaction or strategy described here.
Parametric is headquartered at 1918 8th Avenue, Suite 3100, Seattle, WA 98101. Parametric’s Minneapolis investment center is
located at 3600 Minnesota Drive, Suite 325, Minneapolis, MN 55435. For more information regarding Parametric and its
investment strategies, or to request a copy of Parametric’s Form ADV, please contact us at 206.694.5575 or visit our website,
www.parametricportfolio.com.
Parametric has obtained permission to reprint this article for specified distribution. No other reproduction may be disseminated
without the publisher’s written approval.
The Publisher’s sale of this reprint does not constitute or imply any endorsement or sponsorship of any product, service or organization.
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© Entire Contents copyright by Crain Communications Inc. All rights reserved.

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