A blend of technical and quantitative expertise with years of industry experience goes into the demanding task of finding exceptional managers for each asset class, according to Northern Trust Global Investments
Why should trustees sometimes be expected to choose one investment style and pin all their hopes on that style for the future, when they can be offered a blend? This is the question posed by Northern Trust Global Investments, the leading multi-manager specialist. Part of US financial giant, The Northern Trust Company, NTGI runs £8bn (e13.4bn) out of its £180bn under management through multi-manager strategies for some 200 clients.
Tony Earnshaw, director of UK and European multi-manager products, points out that this approach controls manager risk and avoids the difficulties trustees experience in timing manager changes. NTGI can boast very strong performance from its balanced funds and other products over rolling three and five-year periods.
“A combination of strong performance and a growing appreciation of the difficulties facing trustees when they try to pick managers has led to a high level of interest among consultants and trustees and we are bullish about the future,” says Earnshaw.
Growth of the business is also undoubtedly helped by parentage. The multi-manager product was a niche business before its acquisition by Northern Trust and subsequent amalgamation into Northern Trust’s other investment activities. The existing strong commitment to integrity and innovative solutions married well with the Northern Trust client-focused ethos. The UK business is now fully harmonised, with a strengthened and higher profile.
Northern Trust, founded by the Smith family of Chicago in 1889, is a financial giant whose other activities include advising some of the wealthiest families in the US, a substantial custody business, US- based asset management and stock lending expertise.
NTGI in the UK manages cash, with fixed interest management coming on line later this year, and in-house equity management to follow. The spearhead of Northern Trust’s international exposure to active investment management, however, is the multi-manager initiative in the UK, soon to be widened to continental Europe.
NTGI’s multi-manager approach is based on an underlying belief that there are high- quality talented individuals who excel in any walk of life. “There will always be people who excel,” says Earnshaw. “Think of Dizzy Gillespie, Yehudi Menuhin or Ryan Giggs. The same applies to investment management.”
NTGI aims to find those exceptional managers and blend them in NTGI’s portfolio in combinations that will suit the aims and objectives of its pension fund clients.
Very large funds can combine managers themselves, assisted by their consultants. For the small or medium-sized funds, this is less practical. A multi-manager approach means that each manager manages a smaller tranche of the assets and what seems like a good idea could get derailed by practicalities. This is where NTGI comes in.
NTGI offers a ready-made blend in its pooled pension fund product, the Diversified Fund of the UK (DFUK). The DFUK is an unauthorised unit trust which clients can use for one asset class only, for multi asset classes to their own, perhaps liability-driven, benchmark, or they can buy into NTGI’s discretionary balanced mix.
The selection, monitoring and review of the managers to form this mix is a demanding task, and NTGI’s multi-manager team combines technical and quantitative expertise with years of industry experience. The DFUK investment committee, which masterminds the process, comes from a variety of backgrounds. Will Green, chief investment officer for multi-manager international investment programmes has over 20 years of direct investment experience, while Ted Krum has particular skills in quantitative analysis of investment management portfolios. The other two members of the committee, Nick Patel and Tony Earnshaw both spent a number of years in the consultancy industry before joining NTGI.
Earnshaw is the most recent hiring, brought in to run the UK multi-manager activities in place of Terry Webb, who retired in 1998. Northern was looking for someone with consultancy experience and marketing knowledge who was also able to be part of the management team driving the current business and developing products. The job was tailor-made. Earnshaw spent a number of years as part of a strong management team, building a consultancy operation from a small start to a 150-strong, respected and profitable consultancy. He was part of the investment team driving the same consultancy, SBJ Benefit Consultants, to the point where it was recognised by fund managers in 1998 as a top 10 investment consultant.
“What impressed me about Northern Trust in general and NTGI in particular,” says Earnshaw, “was the level of commitment to the clients and to the products, and that they were also there for each other as a team. I had worked with a strong team which was difficult to leave, but I felt I really wanted to work with these people.”
So how does the approach work? Perhaps the best illustration is to look at the UK equity fund, which is the largest and in many respects the most crucial. Here, NTGI has blended together three very different managers with different styles.
The core UK manager is Carolan Dobson, head of UK equities at Abbey National Asset Managers. Dobson’s brief is to anchor the portfolio by running a large cap, index-sensitive portfolio and, on a pragmatic basis, move between value and growth stocks as she judges best.
Dobson is a key figure at Abbey National, where she has been instrumental in introducing new disciplines and processes. This in turn helps Abbey National to qualify for NTGI’s second criterion, which is that, having identified the talented individual, the organisation must be a good fit. In other words, the organisation must provide resource and discipline and, most importantly, help rather than hinder the individual to achieve their potential.
Dobson’s central portfolio is flanked by Prakash Rajasekaran of Jupiter on growth and Phillip Watson of Mirabaud TWH on value. Both are classic examples of the added value that NTGI can bring. NTGI’s association with Jupiter goes back to the arrival of Leonard Licht from Mercury. NTGI was not able to back Licht when he was at Mercury because of the sheer volume of money he was running. However, convinced of his star quality, they were waiting with a contract to sign when he walked into Jupiter. After he retired, NTGI stayed with the firm because it liked Will Littlewood, whose UK income unit trust is a top-decile performer. Over the years, Littlewood has more than justified the faith NTGI showed in him and has been flexible enough to temper his small and medium sized company bias in times when the large caps have been dominating. Rajasekaran started working with Littlewood on the fund some time ago and NTGI have remained with Rajasekaran during Littlewood’s recent ill-health. Watson is a minority owner of Mirabaud TWH, with his majority partner being the Swiss private bank. Watson runs a concentrated portfolio of value-orientated stocks and is a highly proactive manager with an aversion to risk in his portfolio.
Earnshaw points out that it is not just the high quality of these managers that makes the difference, but the blending of them. “We spend lots of time talking to the managers,” he says, “and on the investment committee, we regularly discuss the right mix between the three.”
In 1998, discussions with Watson and Littlewood resulted in Littlewood being slightly larger cap than might be expected, while Watson held some stocks which his normal value style would preclude. These are sleeves rolled up working relationships. “We don’t just tell them what we expect,” says Earnshaw. “We listen to them as well. They have masses of expertise and we would be foolish not to take notice of it.” Elsewhere, the managers range from teams within large multinationals such as Richard Beggs’ team at Invesco to boutiques such as Windham Capital in New York, a small, highly focused organisation running US large caps.
The great attraction for trustees is threefold. Firstly, the blend of managers avoids the pitfalls of choosing a manager whose style goes out of favour. Secondly, there are the undoubted benefits of controlled risk and strong performance. The third benefit is the degree to which it takes away from the trustees the unenviable responsibility of making decisions about manager changes and getting the timing right.
The practicalities of business life are such that this is extremely difficult for trustees to achieve. The NTGI team is constantly monitoring, constantly supervising and constantly discussing. Decisions to switch managers are not taken lightly but neither are they avoided. The decision to change can be one of style as well as one of performance. Trustees whose funds are in the DFUK, or NTGI’s segregated products, can sleep safely in the knowledge that NTGI is looking after their interests.
For further information contact Gordon Hogarth on +44 (0)20 7675 8112