Some months ago, Karel Stroobants of Brussels-based VKG/CPM took a deep breath and the first step towards a dramatic restructuring of the portfolio of the BFr25bn (Ecu580m) pension fund for Belgian doctors, dentists and pharmacists of which he is deputy general manager. The situation he contemplated was simple and stark. In Belgium you see the process of the euro and its impact on the stock exchange in a small country, in a very accelerated way." He was convinced the Belgian equity market, which accounted for 18% of his portfolio, was going to disappear.

"There was no longer any place for a 'Euro-Belgian equity asset class' in our portfolio, even though we were very pleased with the performance this class gave us over the past five years." As the fund's liabilities are now in euros, he did not see any reason to invest in domestic assets unless that market was not going to add value.

With a Bfr4.5bn portfolio of Belgian stocks and a strong desire to optimise the fund's euro assets, he took the decision to make a move. His problem: "The Belgian market was already quite an illiquid market to manage." The portfolio had big holdings in a few large stocks - it was concentrated in about 20 stocks. "We saw that moving out of the market without influencing it was going to be a hell of a job." And he wanted to be ahead of the pack.

Against that, VKG/CPM had definite ideas where it wanted to go. It was not the sector route for Stroobants: "We believe more in a market cap size approach for our size of fund." But to get there, he decided to call in transition managers.

Firstly, he thought it was more clear-cut from a performance point of view. "We wanted to measure our managers on a clear basis throughout, by having the old performance, then the transition performance and then the managers with their new portfolios fully invested." Transition management means that the managers receive equity, so "they can't play the game of underperformance because there is too much cash". Secondly, the trade was going to be complex even for a pan-European adjustment and so it proved with 717 trades across 15 markets, involving 5.3m shares and 16 currencies and settlement systems.

VKG/CPM chose Morgan Stanley in London, from a short-list of three, says Stroobants. "Because most transition mangers are in the US, they had a European look, as well as having a reporting and preparation process that was extremely good."

At Morgan Stanley in London's Canary Wharf, Alan Rubenstein, managing director of the European pensions group, along with Tom Levy, managing director of program trading, heads up the team handling the transition. He says: "On first contact with VKG/CPM in August, we did as we always do, which was to sit down and went through the issues from his point of view. The key in all of this is planning."

Levy adds: "What we wanted to do then was to draw out from VKG/CPM what were the issues involved, the problems they faced and how the risks could be controlled and how everyone involved was to be co-ordinated." In this case the attention was being focused on the sell side, with the move from a small to a broader market.

"Using our proprietary tools, we were able to identify a number of stocks, where his holdings represented a significant proportion of the turnover of those stocks. So we had to discuss how we should tackle those," says Rubenstein, adding that the aim is to ensure the client understands and is happy with the approach, which is "to implement the transition in the most cost-efficient way possible".

Levy adds that , though the commissions and taxes involved were also examined, the biggest issue was the Belgian market impact. "Other things that came up were the capacity constraints of VKG/CPM's operations in terms of daily reporting of executions and so on, and the involvement of the custodians. The aim is to have no surprises, so that if we say that we are going to look at a certain number of tickets a day, we try to get close to that."

The timing aspects were also crucial, as the fund wanted the transition to be completed by October 1, to fit in with its new quarter for performance monitoring of managers. "The fund confirmed that it would be able to work within the confines of the liquidity analysis we gave them. So then it came down to how we were going to sell the Belgian stock and what we needed to buy for the European managers," says Levy. "We spent considerable time on how to find the channels of liquidity for this line of Belgian stocks." The whole aim is to carry out the transaction so that it is not seen to be happening. Rubenstein adds: "That is the skill people are paying for. Finding liquidity, so we can get it done quickly and quietly."

At this point, Stroobants informed the outside managers of Morgan Stanley's appointment. While Puilaetco would loose its portfolio of Belgian stocks, it was to take on a pan-Europe mid cap portfolio, while the existing managers, Singer & Friedlander for small caps and Gartmore for large caps, would now be able to invest in Belgium, as part of the new pan-European brief, he explains. The fund's global custodian State Street was also actively involved.

The actual trades took about 10 days to complete, after two weeks of preparation, says Levy. "Once the custodian bank confirmed the portfolio as 'ready to sell', that portfolio has to frozen by the asset manager." Similarly, the portfolios you are going to buy have to be frozen as well by those managers. "You have to have a static point A and point B."

Morgan Stanley will not talk about how the liquidity was sourced nor the trading strategies, other than to say they involved the full range of techniques, including a number of block trades. Of the $125m of Belgian stocks only about 10% was crossed. "Because of market turbulence, we decided to sit tight for some days on the sidelines, but we still finished by the set date."

From Stroobants' point of view, it went very smoothly indeed: "There was no market impact of note. The follow-up report showed the position for each stock. It revealed that only in one or two cases there was a small impact, but this was not relevant to the total." The final report, which the manager s see as an important element of the transition process, gave him a "complete insight as to market timing and market impact, which were extremely good for this operation". Knowing the market impact and keeping this to a minimum justified the fees involved in his view. "You can have low fees, but if you buy too high and sell too low, that can cost you a lot for an illiquid stock. It was 30 to 40% cheaper approximately on the fee basis."

Stroobants has no hesitation recommending the transition approach: "If you go to your managers for this you give them opportunities to hide themselves between costs and cashflows and your transparency of performance becomes a lot more difficult." The thing is to simplify the approach as much as possible. "The more you focus the manager on what he has to do the better. Take away all the complications you can."

From an external manager's point of view, Peter Dencik at Singer & Friedlander says this transition "worked very well indeed". He adds: "Particularly in the volatile market conditions, the number of units of each stock changed from day-to-day, so there were close links between our desk and that of the transtion managers." But he does question the extent to which transition managers can add value in the smaller cap marketplace in Europe, compared with a specialist: "You have to know which brokers are following which stocks". So block trades, a feature of transitions, may not be possible. "In this case I think Morgan Stanley did a good job for us and the client."

The heavy involvement of the client in what is going on is very critical for success, says Rubenstein. "VKG/CPM was very good to work with and was an excellent partner in the transaction.""

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