Northern Trust says it is seeing increasing interest in its multi-manager and passive indexing services from time-pressed institutional clients in Asia.
Asset managers report that internal governance and compliance requirements are taking up more of their time, cutting into their capacity to carry out due diligence and research, notes Kevin Hardy, head of Northern Trust global investments for Asia-Pacific.
“They are running at 100%-plus capacity and things they know they ought to be doing they just don’t have the bandwidth to do,” he says. “They are asking, ‘how do I get all these things done?’
“Indexing is plain vanilla and it frees up some time, so they don’t need that constancy of conversation with a manager about performance. So, too, they can pass part of their responsibilities on to a multi-manager to get some of their due diligence work done, freeing up more time.”
At the end of September this year Northern Trust had $657.2 billion in assets under management (AUM), of which its multi-manager business accounted for $39 billion and its indexing segment $286.7 billion. Third-quarter growth in multi-manager AUM was 24%, and 13% for indexing.
Northern Trust’s multi-manager business identifies managers based on their investment philosophy and processes. “We look at what a manager provides in terms of quantitative metrics, who does what, in what asset class and how they are performing,” he says.
“We also go through various steps on the qualitative side to identify underlying management structures, how much vested interest they might have in their organisations, what their governance structures look like, and whether they are compliant or have had any regulatory breaches.”
He notes that Northern Trust has about 200 managers on its global multi-manager database, adding that investment styles are often combined to achieve style neutrality and diversification.
“If a client says they need an MSCI global mandate with a targeted outperformance of 2.5% and a risk tolerance of 5%, for example, our opportunity is to find which combination of managers in our database gives the client what they need,” he says.
“We will combine a growth, a core and a value manager in a single program because if we see there are counterbalancing sets within them, we will pick them.”
Hardy notes that manager selection is driven by client needs, although Northern Trust tends to avoid marquee names. “A lot of the managers in our program are smaller, what we would term ‘emerging managers’. They are people who are passionate about investing and will often have some of their own money invested, which we as an organisation like because they have skin in the game.
“We will spend our time trying to identify those types of organisations because we find they are much more nimble when it comes to transacting and they won’t necessarily follow the crowd. I think that is what gives us a point of differentiation.”
Northern Trust has 100 staff working in its multi-manager business globally, although the vast majority of them are based in the US. “It’s a mix; there are some managers who are Asian specialists, then others will have a global component,” says Hardy. “Where they are located does not indicate their skill-set.”
However, he does concede there are benefits to having people on the ground locally. “We have opted to centralise everything in the US for now. But at some point in the future could that change? Potentially.”
Hardy does not rule out the possibility that Northern Trust could seek to set up a multi-manager presence in Asia. “There are some additional things we will be doing in Asia, some of which will be based around decisions on whether to centralise or decentralise, and some will be about how we opt to deploy our resources in Asia,” he notes.
He confirms that Northern Trust is looking strategically at how to develop its business in Asia, and that increased interest in its multi-manager business is one of the facets that is causing it to consider its current offering.
“[Clients] want to understand how the whole thing hangs together and potentially what components of it are going to be most attractive to them,” he adds. “This is causing us as an organisation to look hard at our business.
“It is also causing us to have some deep and meaningful discussions with some of our prospects about how it is that they want to develop their own internal capabilities. There is a degree of reciprocity in this, it is just finding where the two worlds finally meet in order to make things happen.”