what’s happening in asset management?!
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What’s Happening in Asset Management?!. Chris Carlson Senior Vice President and Head of Strategic Development Northern Trust Global Investments. What’s New in Asset Management?! . Broad Asset Management Trends Today’s Markets Building Winning Portfolios. Broad Asset Management Trends. - PowerPoint PPT PresentationTRANSCRIPT
© 2008 Northern Trust Corporation northerntrust.com
The Northern Trust ExperienceA C C E S S . E X P E R T I S E . S E R V I C E .
What’s Happening in Asset Management?!Chris CarlsonSenior Vice President and Head of Strategic Development Northern Trust Global Investments
The Northern Trust Experience
What’s New in Asset Management?!
Broad Asset Management Trends
Today’s Markets Building Winning Portfolios
The Northern Trust Experience
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
The Northern Trust Experience
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!
The Northern Trust Experience
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
The Northern Trust Experience
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
Ret
urn
(Log
arith
mic
Sca
le, J
anua
ry 1
990
= 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.
The Northern Trust Experience
Hedge Funds
Fund of FundsCommodities
Portable AlphaLiability Driven
Investments
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.
Broad Asset Management Trends
The Northern Trust Experience
Non-Traditional Benchmarks With an “Outcome” Focus
Traditional Benchmarks
Broad Asset Management Trends
This 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
Risk Budgeting Alpha – Beta Separation
Percentage Based Asset Allocation Manager Selection Based on Style Box
Elimination of Style Bias Inclusion of Shorting Alternatives?
Style Focus on “value” or “growth Long Only Investing Traditional Asset Classes
The Northern Trust Experience
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
The Northern Trust Experience
Broad Asset Management Trends
These Trends Are Driving Fundamental Change in the Institutional AND Personal Market Place.
Increased Individual Responsibility
A Return To “Normal” Market Returns
Demand For Increased Diversification
Demand For Broader Access
The Need For Investment Solutions
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 Generation
Firms
Personal Market: Institutional Market:
The Northern Trust Experience
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
The Northern Trust Experience
Today’s Markets
Equity Market Crash 1987
Long Term Capital Management 1998
Tech Bubble Bursting 2000
Sub-Prime Crisis2007
The current crisis is not an isolated event, but another in a series of seemingly more frequent events.
The Northern Trust Experience
Known Knowables
Known Unknowables
Unknown Knowables
Unknown Unknowables
Today’s MarketsWe 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
The Northern Trust Experience
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
The Northern Trust Experience
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.
The Northern Trust Experience
Building Winning Portfolios
Investment Industry Dynamics
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
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
The Northern Trust Experience
Building Winning Portfolios
Personal 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 SeparationRisk Budgeting vs.
Asset AllocationAlternativesDerivative Based Products
Thought Leadership
Increased Client Sophistication & Size
*Source: Casey, Quirk and Associates
The Northern Trust Experience
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
Structured Capabilities
Active Extension
Equity Strategies Hedge
Strategies
Risk Budgeted Asset Selection
Beta Return
Index Mutual Funds
Exchange TradedFunds
Synthetic Exposures
Legacy Individual Securities
Open ArchitectureFixed Income Alpha
Strategies
Other Alternative Strategies
The Northern Trust Experience
Building Winning Portfolios
Needs, Aspirations, Dreams
Investment Program Design
Execution & Monitoring
Financially Secure Clients!
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.
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
© 2008 Northern Trust Corporation northerntrust.com
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What’s Happening in Asset Management?!