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Delaying decisions on investment managers and asset allocation changes could be costly, says BNY Mellon Beta Management

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Institutions that delay investment management changes because of due diligence reviews, contract negotiations and other fund governance-related issues may expose themselves to unrewarded risks and could be better served by implementing an interim investment management solution, according to a white paper from BNY Mellon Beta Management.

BNY Mellon Beta Management, a BNY Mellon Asset Management business that facilitates rebalancing programs and synthetic asset class exposure through the use of futures, swaps, index funds, and exchange-traded funds (ETFs), outlines the risks and potential costs of such a delay in its report, Interim Portfolio Management.

“Utilising an interim manager can provide institutions with market exposure and mitigate risk until a new permanent investment manager takes over the portfolio,” says Jon Platt, director at BNY Mellon Beta Management and a co-author of the report. “The factors that can delay the change from one permanent investment manager to another can add up to several months between the decision to make a change and the implementation. During this period, the institution might needlessly expose itself to market risk or the decisions of an investment manager in which it no longer has confidence.”

The paper examines a range of solutions designed to minimise transaction costs and tracking error, while providing institutions with the type of market exposure sought during the move to a new permanent manager. This includes weighing a variety of factors including the costs of redemption fees required to change the composition of a portfolio and the ability to retain positions from a terminated strategy to fund a new strategy at zero cost.

“In seeking to reduce costs, the decision to trade should only be made when there is a high probability of increased returns or decreased risk,” says Platt. “Transaction costs can be a significant drag on fund performance and over time can impair a fund’s ability to satisfy its liabilities.”

BNY Mellon Beta Management was established in 2008 and now has a three-year track record of offering customised derivatives solutions to aid institutional investors in implementing investment decisions. BNY Mellon Beta Management is a division of The Bank of New York Mellon, a principal BNY Mellon banking subsidiary.
 

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