Northern Trust Global Investments (NTGI), the asset management arm of Chicago-based banking company Northern Trust, is among the top three players worldwide in three fields: securities lending - which it regards as part of its investment management business - passive management, and manager of managers.
Of NTGI’s e466bn in assets under management worldwide at the end of March this year, securities lending accounted for e166bn, passive management for e155bn and manager of managers e21bn.
NTGI’s London-based European operation, NTGI Europe, is almost a microcosm of this business spread. Of the e23bn under management in London, nearly e8bn in securities lending accounts for e11.4bn, passive for e4.5bn and more than e3bn is in the manager of managers business.
Worldwide, NTGI is perhaps best known as an indexer, a position bolstered by its acquisition of the passive and enhanced asset management businesses of Deutsche Asset Management in 2003.
NTGI Europe, on the other hand, is known for different activities in different parts of Europe. In the Netherlands, it is known for its enhanced indexation capabilities. In Germany it has focused on a corporate bond and high yield offering. And in the UK it is known principally as a manager of managers.
Barry Sagraves, the chief executive officer of NTGI Europe, says this is consistent with NTGI Europe’s strategy, which is to identify segments of the institutional market in Europe where it can play to its strengths: “What we’re doing strategically is to provide a broad array of products that we can then combine in unique ways to provide solutions for a very targeted group of clients.
“We do think of our products as being in three different groups, each of which may require a slightly different cultural setting. First there are the ‘custody close’ products – securities lending, transition management and commission recapture.
“Then there is the core product, the passive business. Finally there are the satellite products, that is the actively managed business, including manager of managers. Here we try to foster a smaller company feel, with small teams very focused on what they’re doing.
“So it’s not an ‘all things to all people’ approach, but rather the provision of specific products in a broad array that we can then take to the institutional segment in a few markets in Europe.
“We’re not trying to take over the world in a year. What we are doing is building a good solid business over a period of time by being methodical and serious about the things that we do.”
In Europe, NTGI is focusing on the UK, Scandinavia, the Netherlands, Germany and Switzerland, he says. “They have large and developed institutional markets, they’re accessible from London - although obviously local bases are better and we’ve got plans for those - and they buy the kinds of products that we offer.”
There is the potential in these markets to sell to both new and existing clients in Europe, he says. “We are seeing an increasing number of clients who are considering converting their passive indexation to enhanced and moving up a little on the risk and return scale for a slightly higher fee.”
As a rule of thumb, he says, NTGI Europe will consider entering selected institutional markets in Europe on its own, but will seek partners for entry into any retail business: “Take a market like Sweden. Would we try to do retail ourselves? Absolutely not. Would we do institutional ourselves? Absolutely we would.”
NTGI Europe has already established a series of joint ventures and alliances with European financial institutions in Germany, Italy, Ireland and the UK. In Germany, it has a 50% stake in Helaba Northern Trust, a joint venture with Helaba Invest, the investment arm of the Landesbank for the states of Hesse and Thuringia.
Sagraves says the venture has provided NTGI with access to a market that is notoriously difficult for foreign institutions to penetrate: “Helaba Northern Trust is primarily an organisation to develop and distribute investment services for the German market. Helaba’s client base is both the local savings banks as well as institutions, primarily in their region. They’re busy expanding and growing, and we’re helping them do that by providing them with additional products and capabilities.”
Helaba Northern Trust began as a way to provide European corporate bonds for German investors. It subsequently introduced a US high yield product, packaged as a German mutual fund.
A third product is under consideration, says Sagraves. This may be a manager of manager’s product. “If the next product is manager of managers, as it may well be, it is likely to be distributed via our existing Irish UCITS funds,” he says.
The Netherlands is another area where NTGI plans to extend its reach and broaden its scope, says Sagraves. Last August, NTGI Europe hired a Dutch national, Heico de Boer, to focus on sales in that market. De Boer will be based at a new office in Amsterdam, which NTGI plans to open early next year.
The aim will be to develop products specifically for the Dutch market. These will include products designed to help Dutch pension funds meet the demands of the new FTK rules, Sagraves says: “We’ve had a lot of success with our passive and enhanced products there, and we’re in the process of developing a liability-matching product for the Dutch market with the new liquidity rules.
“We are looking at a couple of products. One would involve the use of derivatives, as a series of cash funds with some derivative overlays. We’re also looking at some long-only products, which may get you to the same place at a lower risk and lower cost.”
The shape of the eventual product will depend on the final rules of the FTK, yet to be decided. However Sagraves says some sort of liability-matching product will be needed whatever the outcome. “ We think that, under any scenario, there will clearly be a funding mandate. There are funds that are sufficiently funded and they will need to maintain that funding, so the baseline is something that maintains pace with liabilities.”
France is also a possible market. Until now, the French institutional market appeared a hard nut for NTGI Europe to crack. Yet Sagraves says there are signs that the market is becoming more receptive to offerings from external managers.
The UK is seen as particularly fertile ground for NTGI Europe’s manager of managers business, set up in London in 1986, initially as part of RBC. Most of this is now pension fund business.
The business is likely to grow, Sagraves suggests, as pension fund trustees assume heavier responsibilities – principally, to select and monitor the performance of asset managers.
“In the post Myners world, trustees find it very comforting to appoint an expert who not only selects the managers but also does the monitoring and manages changes in the management when this is appropriate.
“On average it takes 18 months and costs 1% of the assets to fire a manager and select another. By contrast, through our manager of managers programme. it takes a few weeks and a few basis points to do the same thing.”
The cross-sell channel between NTGI and Northern Trust’s asset servicing business is an integral part of the firm’s sales strategy worldwide, and in the UK it is an important source of business for NTGI Europe.
NTGI is also unusual among asset managers in that it places securities lending within asset management. Sagraves says there are two reasons for this. “The primary reason is that we don’t believe that asset management and asset servicing are incompatible businesses. We’re not separately branded; we’re not off doing our own thing.
“We on the asset management side work closely with our colleagues on the asset servicing business, so philosophically we don’t think there’s a vast divide between businesses
“The second reason is that fundamentally activities like securities lending, brokerage and transitions are investment activities. You are investing the cash collateral, you are doing the stock lending, and you are re-arranging portfolios. These are investment activities and they should take place in an investment organisation.”
Securities lending is becoming attractive to pension funds in Europe, which are eager to extract some added returns from their assets. This includes medium and smaller pension funds, Sagraves says.
“As technology has improved and as the business has become more sophisticated we, and our clients, find ourselves able economically to engage in smaller sized programmes.
“So, for example, we do stock lending in our Dublin mutual fund range, which incorporates our institutional funds for manager of managers, cash and passive. Those funds are clients of our lending programme.”
The ‘custody close’ services also enable cross-selling between the custody and asset management sides of Northern Trust, he adds. “We have a Dutch client that we obtained through the Deutsche acquisition who then wanted to move into active pan Europe. We bid for that and won. As a result we now manage the entire pension fund assets, some passive and some active.
“The client then decided they wanted to change the custodian, so we introduced them to our custody colleagues. We now do both the custody and the asset management and our Dutch client can turn to one organisation.”
“That, to me, is the power of being part of Northern Trust – the ability to provide a broader set of capabilities and that is a real benefit.”
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