name: chris carlson title: head of strategic development northern trust global investments
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What’s Happening in Asset Management?!. Date: May 22, 2008. Name: Chris Carlson Title: Head of Strategic Development Northern Trust Global Investments. What’s New in Asset Management?! . Broad Asset Management Trends. Today’s Markets. Building Winning Portfolios. - PowerPoint PPT PresentationTRANSCRIPT
© 2008 Northern Trust Corporation northerntrust.com
The Northern Trust Experience
FOCUSING ON WHAT REALLY MATTERS
Southeast Region
Name: Chris CarlsonTitle: Head of Strategic Development Northern Trust Global Investments
Date: May 22, 2008
What’s Happening in Asset Management?!
2 The Northern Trust Experience
A C C E S S . E X P E R T I S E . S E R V I C E .
What’s New in Asset Management?!
• Broad Asset Management Trends
• Today’s Markets
• Building Winning Portfolios
3 The Northern Trust Experience
A C C E S S . E X P E R T I S E . S E R V I C E .
Broad Asset Management Trends
Moderating Long-term Expected Returns
Underperforming Investment Capabilities
*Source: Casey, Quirk and Associates
A combination of investment developments is serving to expose shortcomings in how the investment industry serves our clients…
Changing Retirement Needs & Expectations
Regulatory Demands
Under Saving & Inflexible Investment Products
Shift to Individuals
4 The Northern Trust Experience
A C C E S S . E X P E R T I S E . S E R V I C E .
Broad Asset Management Trends
Investor Challenges
*Source: Casey, Quirk and Associates
…As a result, the individual investor – regardless of accumulated net worth – is facing an unprecedented set of challenges
Inadequate Investment Expertise
Normalized Return
Environment
Concerns of Retirement Volatility
Increased Personal
Responsibility
Potential Funding
Gaps
Investment managers must work with clients to help them adjust to this landscape, educate them on how to succeed, and invest for
them in capabilities that will secure their future!
5 The Northern Trust Experience
A C C E S S . E X P E R T I S E . S E R V I C E .
We are now facing a moment of historic change in the industry…
Changing Investor Expectations and Needs Institutional clients are rethinking their pension strategy rather than rebalancing their asset
allocation
Plan sponsors are strategically re-evaluating the pension plan
Shifting to DC from DB
Growing number of under-funded plans
Current and pending regulatory changes Personal clients are rethinking investment strategies as a result of an increased
responsibility for their own financial security.
Integrated solutions with full asset allocation
Demand for best in class investments
Increase in demand for fixed annuity streams
Demand For Alpha & Alternatives Grows Focus changing to total return The importance of hedge funds and manager of managers A growing list of alternative asset classes are increasingly important
Broad Asset Management Trends
6 The Northern Trust Experience
A C C E S S . E X P E R T I S E . S E R V I C E .
Broad Asset Management Trends
0.1
1.0
10.0
Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08
S&P 500 HistoricalJanuary 1926 - December 2005 Annualized Return:
+10.4%
Cum
ulat
ive
Nom
inal
R
etur
n (L
ogar
ithm
ic S
cale
, Ja
nuar
y 19
90 =
1.0
)
Annualized S&P 500 ReturnsJanuary 1990 - March 2000: +18.0% April 2000 - December 2005: (1.6%)
January 1990 - December 2005: +10.6%
Source: Standard & Poors; Casey, Quirk & Associates analysis.
Late 90’s out-performance and the subsequent reversion to a normalized return environment is one factor driving a generational shift in the asset management business
7 The Northern Trust Experience
A C C E S S . E X P E R T I S E . S E R V I C E .
Hedge Funds
Fund of FundsCommodities
Portable AlphaLiability Driven
Investments
Broad Asset Management Trends
Complexity
1970’sFirst Generation:
Limited Product Suites
1980’s 1990’sSecond Generation:
Asset Allocation / Specialization
2000’s
Third Generation:The Total Firm
Product Focused
Sales
Investment Solutions
EquityFixed Income
Cash
Value EquityGrowth Equity
Large CapMid Cap
Geographic AllocationPrivate Equity
Real Estate
Small CapCore Fixed Income
High YieldSector Allocation
Shift in PensionAccountability
Alternatives AreMainstream
Globalization
Rapidly AgingPopulations
VulnerableCompetitors
Under FundedPensions
Changing PensionRegulations
The increased financial pressure, changing pension regulations, shifting demographics, and greater product choices are also driving the generational shift in asset management
8 The Northern Trust Experience
A C C E S S . E X P E R T I S E . S E R V I C E .
Non-Traditional Benchmarks With an “Outcome” Focus
Elimination of Style Bias Inclusion of Shorting Alternatives?
Risk Budgeting Alpha – Beta Separation
Traditional Benchmarks
Style Focus on “value” or “growth Long Only Investing Traditional Asset Classes
Percentage Based Asset Allocation Manager Selection Based on Style Box
Broad Asset Management TrendsThis generational shift is fundamentally changing the way that our clients will expect us
to invest their assets
Second Generation Third Generation
*Source: Casey, Quirk and Associates
9 The Northern Trust Experience
A C C E S S . E X P E R T I S E . S E R V I C E .
Broad Asset Management Trends
Traditional Active Management: The Deconstruction of a Classic Favorite!
Alpha Return: Manager Skill
Beta Return: Market Return
Second Generation Approach
•One Price•Unclear Return Sources•Hard to Determine Manager Skill
Third Generation Approach
Beta ProviderETF’s, Indexing, Derivatives
Alpha Provider(s)Hedge Funds, Real Estate, Private Equity, Other Alts•Absolute Return Focus•Pay for Performance•Identifiable Skill
•Efficient Exposure•Minimal Cost
Deconstruction
*Source: Casey, Quirk and Associates
10 The Northern Trust Experience
A C C E S S . E X P E R T I S E . S E R V I C E .
Broad Asset Management Trends
These Trends Are Driving Fundamental Change in the Institutional AND Personal Market Place
Personal Market:•Increased Individual Responsibility
•A Return To “Normal” Market Returns
•Demand For Increased Diversification
•Demand For Broader Access
•The Need For Investment Solutions
Institutional Market:•Closing of DB Plans
•Demand To Put Plans On “Auto Pilot”
•Limit Financial Impact of Plans on P&L
•Reassessment Of The Asset/Liability Equation & The Management of Assets
•The Need For Investment Solutions
3rd GenerationFirms
11 The Northern Trust Experience
A C C E S S . E X P E R T I S E . S E R V I C E .
Broad Asset Management Trends
Third Generation Firm Characteristics Relative AND Absolute return orientation Dynamic solutions strategy orientation Alternative investment capabilities Financial engineering Alpha generation capabilities Appropriate fee strategies
Investors Need Firms That Have Access To The Component Parts
*Source: Casey, Quirk and Associates
12 The Northern Trust Experience
A C C E S S . E X P E R T I S E . S E R V I C E .
Today’s Markets
Equity Market Crash 1987
Long Term Capital Management 1998
Tech Bubble Bursting 2000
Sub-Prime Crisis 2007
The current crisis is not an isolated event, but another in a series of seemingly more frequent events
13 The Northern Trust Experience
A C C E S S . E X P E R T I S E . S E R V I C E .
Today’s Markets
We know the basics of each of these markets events, the more important question is how does risk management work and what breaks down in a market crisis?
Knowable Unknowable
Known
Unknown
Rational Participants
Known Knowables Known Unknowables
Unknown Knowables Unknown Unknowables
14 The Northern Trust Experience
A C C E S S . E X P E R T I S E . S E R V I C E .
Today’s Markets
Complexity – Look to evolution to understand
Tight Coupling – How close are the dominoes?
There have been crises as long as there have been markets. Is anything different in today’s market environment?
In some views, part of the problem has been our quest for transparency and specificity. The other is fear
Transparency & Specificity Traders alter or hide behavior Increased “information” can increase instability
Fear – The “experimental neurosis example”
*Source: A Demon of Our Own Design – Richard Bookstaber 2007
15 The Northern Trust Experience
A C C E S S . E X P E R T I S E . S E R V I C E .
Today’s Markets
We have a wave of vehicles that need to mature
Losses are being recognized AND realized
Final clarity on who has what and how much
A resumption of normal function
Time, risk management and liquidity heal all
16 The Northern Trust Experience
A C C E S S . E X P E R T I S E . S E R V I C E .
Building Winning Portfolios
Investment Industry Dynamics The separation of alpha and beta return
The ascendancy of quantitative and alternative investments
Increased use of derivative instruments and derivative strategies for risk management and investment
The implementation of performance fees
Loosening of benchmark restrictions
Personal clients are becoming increasingly sophisticated and re-thinking their approach to investing as a result of increased
responsibility for their financial security
Demand for diversified and risk managed portfolios
Demand for best in class asset managers
Increase in demand for fixed annuity streams
Demand for total return that ensures net principal grows faster than inflation
Personal Market Dynamics
*Source: Casey, Quirk and Associates
17 The Northern Trust Experience
A C C E S S . E X P E R T I S E . S E R V I C E .
Building Winning PortfoliosPersonal market and investment industry trends are driving an
evolution in the client conversation that is much more focused on liabilities, goals and investment outcomes
Old Paradigm Client Conversation
Product Focused
Proprietary Architecture
Equity/Fixed Income Asset Allocation
Individual Security Orientation
Traditional Benchmarks
New Paradigm Client Conversation
Consultatively Focused
Outcome Oriented
Open Architecture
Unconstrained Solutions Alpha/Beta Separation Risk Budgeting vs. Asset
Allocation Alternatives Derivative Based Products
Thought Leadership
Increased Client Sophistication & Size*Source: Casey, Quirk and Associates
18 The Northern Trust Experience
A C C E S S . E X P E R T I S E . S E R V I C E .
Beta Return
Index Mutual Funds
Exchange TradedFunds
Synthetic Exposures
Fixed Income Alpha
Strategies
Structured Capabilities
Active Extension
Equity Strategies
Hedge Strategies
Other Alternative Strategies
Risk Budgeted Asset Selection
Legacy Individual Securities
Asset managers must be prepared to deliver the investment capabilities that fulfill client needs from a menu of beta and open architecture alpha strategies
Building Winning Portfolios
OpenArchitecture
19 The Northern Trust Experience
A C C E S S . E X P E R T I S E . S E R V I C E .
Building Winning Portfolios
Needs, Aspirations, Dreams
Investment Program Design
Execution & Monitoring
Financially Secure Clients!
1. Objective Analysis:•Liability Review
•Life Goals•Fears/Dreams
2. Solutions Perspective:•Best in Class Investments•Optimizing the Efficient
Frontier•Tax Sensitivity
3. Implementation:•Efficient Execution
•Rational Pricing•Risk Monitoring/Mgmt.
4. The End Game:•Growing Financial
Security•Generational Wealth
Transfer•Growing AuM
Targeted Financial Solutions
One size does not fit all….financial solutions, and the manager value proposition depend on understanding client needs and delivering investments that reflect these considerations