Russell Calls for Common Performance Standards to Measure Burgeoning Transition Management Industry (Russell.com)

Russell Calls for Common Performance Standards to Measure Burgeoning Transition Management Industry
Unreported Transition Costs Affect Pension Funds Dearly

TACOMA, Wash. — April 21, 2003 — A paper published today calls for the transition management industry to adopt common standards for the calculation and presentation of performance during portfolio transitions.

"Without common standards, investors cannot have complete confidence in the transition results quoted to them," said the paper's author, Robert Collie, a director at Frank Russell Securities.

The absence of these standards leaves clients with incomplete reporting in many cases.

"Across a broad cross-section of transition reports we have seen, the unreported performance loss is frequently two or three times the reported cost. Fifty basis points, sixty basis points; sometimes more than 1 percent of the assets being moved," argues Collie. "Investors don't even know this is happening and, with an estimated $1.5 trillion to $2 trillion transitioned industry-wide in 2002 alone, the figure on unreported cost could be staggering."

Collie argues it is possible for the same measurement disciplines found elsewhere in the investment industry to be applied to transitions.

"The client really would like to hold the target portfolio straightaway, and to make the change without cost," he said. "That's not possible, but it is possible to use the target portfolio as the benchmark against which actual performance is measured."

The technical term for the difference is implementation shortfall.

"Both the target portfolio and the actual portfolio are measurable using the techniques adopted by the rest of the investment industry," Collie added.

While it is easy to argue for the principle of common standards, getting agreement on the details is not. The purpose of the paper, Collie said, is to encourage debate in the industry, attract comment from other interested parties and thus facilitate the introduction of generally-accepted standards.

The paper, titled "Performance Standards for Transition Management," appears in the winter (2003) edition of The Journal of Performance Measurement. It is aimed at, among others, transition providers, investors and consultants.

"Investors and consultants should be able to count on the figures they see meaning what they expect them to mean." Collie said. "They should be getting actively involved in this debate."

Collie said he expects a positive response to the paper from other transition providers.

"I think we all agree it's time to get together and agree what we are going to do about benchmark selection, timeframes and the calculation of composites," he said. "Implementation shortfall is becoming the accepted terminology, but that can mean different things to different people. Without a clear, unambiguous reference point for starting measurement, performance measurement and results may vary widely for the same transition."

The paper is summed up by the opening quotation, from Humpty Dumpty in Lewis Carroll's Through the Looking Glass: "When I use a word it means just what I choose it to mean — neither more nor less."

Likewise, Collie said, "It is time for a more objective standard than Humpty Dumpty's to be applied to transition performance numbers."

Frank Russell Securities, Inc., member NASD, SIPC, and federally registered investment advisor, is a wholly owned subsidiary of Frank Russell Company. Through its transition management service in 2002, Russell completed a total of 434 transition events. Transition management is one of several services Russell offers to institutional investors. Other services include commission recapture, policy implementation, long-term investment management, asset allocation advice, employee education, custody, performance reporting, recordkeeping and trusteeship.

Frank Russell Company, a global leader in multi-manager investment services, provides investment products and services in more than 35 countries. Russell manages more than $76 billion in assets and advises clients worldwide representing more than US$1.6 trillion. Founded in 1936, Russell is a subsidiary of Northwestern Mutual and is headquartered in Tacoma, Wash., with additional offices in New York, Toronto, London, Paris, Singapore, Sydney, Auckland and Tokyo.

Frank Russell Company, a Washington, USA corporation, operates through subsidiaries worldwide.