Barry Sagraves, chief executive officer of Northern Trust Global Investments (NTGI), thinks “its OK, if not quite beautiful to be big”. While such a view would be expected of one who works for an investment house with worldwide assets under management of $607bn, Mr Sagraves adds that the long-running question of the optimal company size in fund management might never be resolved.
“Whether you are a small, medium or large-sized operation, if you know your target market, your capabilities and what your culture is, you ought to be successful. Putting a racy boutique culture into a huge organisation does not work. Putting a lot of bureaucracy into a boutique does not work and being a mid-sized fund house that wishes it was either big or small is a problem.”
From NTGI’s international headquarters in London, Mr Sagraves oversees all the firm’s investment business activities in the UK, continental Europe, Middle East and Far East. Since joining from Martin Currie in April 2003, he has presided over a doubling of London-managed assets from £10bn to approximately £21bn (€30.7bn).
Asset growth
This growth in assets under management, he says, has been across NTGI’s product range of passive and enhanced indexation, active equity and fixed income and multi-manager programmes.
A key element of Mr Sagraves’ business development strategy is the promotion of investment products to Northern Trust’s custody and fund administration clients.
“We do a certain amount of joint calling, where we introduce the company and when one part of the organisation has won a client, we are very keen to try to get the other part of the company involved as well.”
This integrated business approach has helped NTGI to win securities lending and cash management mandates from custody clients.
Securities lending represents the largest part of NTGI’s worldwide operations, accounting for $212.6bn of cash collateral. Of the £21bn of assets managed in London, some £13bn is securities lending and cash management assets.
But it is other products such as passive and enhanced indexing and manager of manager capabilities that are central to NTGI’s strategy of growing its business outside North America.
In the UK and continental Europe, the firm is actively promoting its £2.3bn multi-manager strategies to investment consultants and through the development of third-party distribution relationships.
NTGI has been active in mainland Europe since 2001 when it formed its first joint venture in Germany with Helaba Bank to market enhanced index and quantitative investment strategies to German institutions. The firm is now looking to introduce its 14 multi-manager funds to these investors. In the same year, Northern Trust struck an alliance with the Italian banking group, Mediolanum and runs €650m of assets in four of the bank’s Dublin-based mutual funds on a multi-manager basis in addtion to another €1.2bn in undisclosed mandates.
Most recently, NTGI teamed up with Nordea to provide manager research, selection and monitoring to the Nordic financial services group’s new multi-manager funds. NTGI will act as sub-advisor to the funds which will be sold via Nordea’s life and pensions distribution channels.
Mr Sagraves maintains that fewer and deeper distribution links are preferable to the striking of multiple partnership agreements which mean simply that product is placed on the “shelf of a bank”.
He says. “This does not necessarily lead to sales. We have picked a few markets and we are creating a strategy for each of these markets. We think this approach not only fits the Northern Trust culture of being prudent, but it also makes better business sense.”
He sees the alliance with Nordea in Finland as a springboard to launching NTGI products into the Nordic region, adding that the two companies are currently talking about future product distribution possibilities.
The firm is also in discussions with a Swiss-based organisation with a view to signing a distribution deal. The new partnership in Switzerland will initially focus more on quantitative products.
A new representative office is due to open in Amsterdam in March which, says Mr Sagraves, will allow NTGI “to service the Dutch market better”. The firm has a number of institutional clients in Holland.
Northern Trust’s established asset administration activities in Germany, Switzerland, the Netherlands and the Nordic region are hailed as a lucrative opportunity to win investment management business.
NTGI is not explicitly targeting institutional investors in France, Spain and Portugal, although the firm has picked up some mandates in these markets.“Having a couple of clients in every market is very difficult from a service standpoint,” he says.
Enhanced indexing
NTGI is also seeking to win more enhanced indexing mandates in continental Europe. While the firm has won some large passive management mandates from European institutions, Mr Sagraves says the volume of indexed assets managed for these investors does not warrant either a focus on building up the passive management business or trying to “convert” such mandates into enhanced indexing briefs.
He says: “Historically, our passive business has been very small in continental Europe.”
In the UK, the firm manages a range of mandates, including UK equities and Asia, ex Japan briefs. These capabilities are housed in a Dublin-based range of eight investment funds. The UK is the firm’s biggest market outside the US accounting for $10bn of managed assets.
Over the next three years, Northern Trust would like to become a dominant player in manager of managers and enhanced indexing, while “continuing to be successful” in securities lending.
Mr Sagraves adds that the company would also like to be a significant player in liability-driven investment (LDI) strategies.
He says: “We are looking to create an LDI product that lies somewhere between a pooled fund and a separate account. The product must be viable commercially while meeting the needs of the client. We have talked to prospects among our pension fund clients and we are working through exactly what the product should look like.”
The LDI strategy will be launched in the next few months. While acknowledging the attraction of such products to underfunded Dutch and UK pension schemes, Mr Sagraves is not concerned about being late to this market.
“We have found a lot of value as a company in being, in some cases, more of a fast follower than a leader,” says Mr Sagraves.
He cites Northern Trust’s late entry into China - the firm opened a representative office in Beijing for the asset administration business in mid-2005 – as another example of the firm’s preference for waiting and seeing the lie of the investment landscape.
“We just decided to plant our flag and see what happens. We haven’t forged a joint venture fund management operation yet.
“In the meantime, we have managed to create some great relationships with the regulators, with some of the major players and with some unusual organisations that you might not think of targeting, if your strategy was to form a joint venture. So we think that by watching other people you can see what works and what doesn’t and come in and do it right. We are taking the same approach with LDI.”
NTGI will not apply for a fund management licence until the Chinese securities regulator, the CSRC, starts issuing more such licences again in 2007. In the meantime, Northern Trust as a whole, is working on creating “a more detailed strategy” for capitalising on both asset management and administration opportunities in the Chinese financial services sector.
Mr Sagraves explains: “This entails the custody and trustee side of the business working with some government agencies on a consulting basis, as well as with some of the larger banks. We are finding that asset servicing clients need asset management capabilities, be it in cash or indexing, either onshore or offshore. And we are not going to throw 50 people at the problem. We will take again a measured approach; we will need a partner on the asset management side possibly through a traditional joint venture with a Chinese fund manager. Alternatively, it might be a relationship with a non-traditional asset manager where we develop the asset management products over time.
“What may help us is that at some point over the next few years, there will be further reform of the insurance sector and we think that is a good institutional market for us.”
Another opportunity he highlights is China’s enterprise annuity programme which is similar to the US’s 401k retirement plans, where the employer selects the asset manager.
But it is likely to be some time before these voluntary corporate retirement savings schemes are up and running. Of the 22,000 or so enterprise annuity schemes which have been authorised so far, very few have actually been set up or funded.
But remarking that China has “a massive retirement problem”, Mr Sagraves believes that over the next three years, either tax breaks or a mandatory decree or both will be put in place to spur the creation of these schemes.
He expects to hammer out his business strategy for China over the next six months.
“We know what we are going for. It is just a question of deciding whether to buy or to build. Certainly, in the next several years we would expect to be managing assets in China with a local office.
Northern Trust has had a representative office in Hong Kong since 1995 which focuses on securities lending and fund administration. NTGI has just hired an asset management sales person to start in mid-February. “Again the office follows the integrated Northern Trust business model, where people go out and demonstrate what the company can do. The office services clients in Hong Kong and South Korea. Most of the assets we manage there are indexed. But we are beginning to see the manager of managers business grow, some interest in enhanced indexing and the odd European or US active equity mandate as well.”
NTGI has been active in Japan since it bought Deutsche Asset Management’s passive business in September 2002. Since then, it has opened an office and built up assets under management in excess of $15bn for Japanese institutional investors in products such as securities lending, multi-manager strategies and funds of hedge funds. Mr Sagraves expects more interest in the latter two capabilities going forward.
While he believes that South-East Asia and Japan will be a rapidly growing source of new business in the years ahead, the absolute size of mandates and assets raised will be low compared to the business growth potential of the UK and continental Europe.
“Continental Europe is probably where we will grow the fastest with the most assets, partly because of our increasing presence there as a company and partly because we are at the earlier stage of enhanced indexing and manager of managers,” says Mr Sagraves.
Over the next three years, his first priority will be to add to the sales team in London and then to begin “the missionary work” in some new markets. This will involve calling on prospects, getting to know the consultants and seeking joint venture or distribution partners. He hastens to add that his goal is not simply to increase total assets under management, observing that “you can grow assets under management without making more money and that is not a winning strategy”.
He concludes: “Over the next few years, I would expect that we may or may not have more offices in continental Europe, but we will definitely have more sales coverage and I am certain we will have more distribution arrangements. The opening of offices will probably come last as a priority. Once we win new clients through an expanded sales effort, we will start thinking about new offices.”
