The Army Emergency Relief and the Clara Abbot Foundation are two of the American endowments that recently have chosen Northern Trust to outsource their entire investment programme. The first body – committed to assist soldiers and their families to overcome financial emergencies – outsourced a $230m (E237m) portfolio; the second one – that provides financial assistance to employees, retirees and surviving families of Abbott Laboratories – outsourced a $350m portfolio.
“We are seeing a growing trend among foundations, endowments, corporate retirement plans and other not-for-profit organisations towards outsourcing entire investment programmes with a single strategic partner, because they recognise the efficiencies and performance benefits they can achieve doing so”, comments Dave Dystra, responsible for this business at Northern Trust, headquartered in Chicago.
The last set of scandals and bankruptcies in the US has increased the pressure on corporations about how they design retirement plans. That is one more reason to ask advisers for help. “Companies are realising that pensions and financial asset management are not their core business,” says Dystra. “We see the outsourcing business growing 15/20% a year and more operators trying to enter it”.
Currently Northern Trust is supervising $7bn assets on behalf of US pension funds and endowments, with a total of $18bn assets under management for third party institutions. The bank offers fully bundled and semi bundled services to both defined benefit and defined contribution plans, targeting especially DB funds with assets between $15m and $2bn. The typical client is a corporation that is downsizing its administrative staff or it is acquiring a company with a complex pension plan or it simply does not have enough internal resources, people, technology to deal with all pension related problems.
Northern Trust Global Advisors (NTGA) is the subsidiary that provides full service solutions including: customised money manager research; multi-adviser programme design; contract negotiations; comprehensive administration; asset allocation management; portfolio rebalancing; integrated custody and accounting; compliance functions; adviser relationship management; consolidated reporting; board reporting; communication and education programmes.
“The ultimate legal fiduciary duty remains with plans’ sponsors,” points out Dystra. “But we consider ourselves a co-fiduciary and partners of our clients. Our strength comes from having the expertise for all sides of the pension fund industry.”
Northern Trust specialises as a manager of managers for the Investment Program Solutions (IPS) service: they select a group of specialised money managers with complementary styles and disciplines for each of the portfolio they administer. “We were the first ones in the US to offer in 1979 multi-adviser fund for pensions. We believe that different styles, when combined, diversify the risk without limiting the potential return of the account as a whole,” he says.
“We use both quantitative and qualitative criteria for selecting managers. We have developed proprietary technological tools. But the qualitative assessment bears the highest importance”.
Through over 20 years of experience structuring and managing multi-manager programmes, including over 400 on-site visits per year, NTGA has identified several characteristics that, claims are helpful in identifying managers that tend to achieve superior, long-term results: independent thinking, unencumbered decision-making, personal discipline, flexibility, a constant discipline that is repeatable, dedicated commitment to the business”.
So the first step is to review a firm’s organisational structure, backgrounds of the key professionals, investment philosophy and process, portfolio characteristics and available performances provided in response to NTGA’s questionnaire. “Then we interview managers and go to visit them on-site,” continues Dystra. “We discuss deeply with the key investment people and examine the firm’s actual operation”.
Only after NTGA’s analysts became familiar with a manager and found it acceptable on a qualitative basis, they look at the historical performance data and use quantitative tools to judge them. “Data alone is not a predictor of future success and can be grossly misleading,” stresses Dystra. “Key is understand whether certain results are just lucky or they may be repeated.”
Once chosen, money managers are closely monitored through a whole set of tools, including quarterly portfolio analysis and performance attribution, using data from NTGA’s internal programs, BARRA, Frank Russell and other sources. NTGA takes also the responsibility to fire managers, when something goes wrong: for example major staff defections occur, the firm’s structure or its investment style changes. Seldom poor performance is the only cause for termination.
Services for DC plans include not only the selection of investment management options, but also a wide array of instruments to communicate with plan members like a 24x7 web site where participants can perform inquiry and transaction activity and seek financial advice. The latter is given by Financial Engines, the high-tech advisory boutique set up by Nobel laureate William Sharpe.