Global survey of 121 institutional investors representing over US$500 billion in assets

LONDON -- (BUSINESS WIRE) --

The evolving use of passive investment strategies by institutional investors globally is leading to growing interest in customized indices to meet fund objectives, according to a new Northern Trust white paper.

A Northern Trust survey of 121 institutions, predominantly pension funds, in Europe, Asia and North America, forms the basis of the white paper entitled, Customized Beta: Changing Perspectives on Passive Investing. The survey investigates the attitudes and practices of institutional investors at a time when turbulence and uncertainty have given rise to a heightened focus on transparency and risk management. Additionally, the research highlights how the increased use of passive investing is leading to a blurring of traditionally-held views on the separation of alpha and beta, as more choices exist for investors within the spectrum of beta.

In the survey, 40 percent of institutions globally identified customized beta as being relevant to their current portfolio construction models. More than half of respondents (51 percent) said they would be interested in exploring customized indices as a way of addressing their objectives. However, only 22 percent have evaluated customized beta approaches.

Investing with Purpose

"Investors around the world are reframing their thinking about their funds' objectives, with an overwhelming 84 percent from our survey saying that meeting their investment objective is more important than outperforming a benchmark," said John Krieg, managing director, asset management, Europe, Middle East & Africa region, Northern Trust.

Increased Focus on Passive Investments

Worldwide, approximately one third of all institutions surveyed say passive products make up more than 40 percent of their equity and fixed income assets today. In the next three years, approximately 40 percent of all institutions surveyed said that more than 40 percent of their equity and fixed income assets will be in passive portfolios. Despite this continued trend toward allocating to index strategies, less than one third (29 percent) consider their level of exposure concentration from existing indices when selecting a new index. At the same time, 63 percent of all participating institutions said that known inefficiencies should be addressed and removed, with one in five saying they would be willing to pay for this service.

More Time spent on Manager versus Index Selection

For approximately two thirds of all respondents (63 percent), index selection occupies 10 percent or less of the time they devote to investment activities. In both Europe and North America, the majority of institutions dedicate a maximum of 10 percent of their time to index selection. By comparison, 82 percent of all respondents spend more than 10 percent of their time on manager selection.

"Even if you spend a good deal of time selecting your manager, you could still fail to meet your investment goals if you choose the wrong benchmark," said Krieg.

For just over one third (35 percent) of the total, index selection occupies 11 percent to 30 percent of their time, compared to half of all respondents in Asia. Only 3 percent of all respondents devote more than 30 percent of their time to index selection, with the highest contribution to this average from Europe.

"As the role of index investments in institutional portfolios evolves, along with the spectrum of techniques available to help investors achieve the index exposure they want, there is a need for more education about, and analysis of, the implications of customized beta approaches," said Krieg. "In the future, we would expect to see institutional investors devoting more time and considering a broader range of approaches when selecting indices, as investment managers and consultants educate them about the potential benefits of customized beta and as investors see the approach being successfully applied by their peers."

Perceived benefits of customized benchmarks vary regionally

Those surveyed cited two primary benefits to a customized beta approach: enhanced risk/return trade-offs and increased diversification. Beyond these, institutional investors around the world see additional, varying benefits:

• European respondents view customized beta strategies as having the potential to boost transparency, and an effective screening tool to meet socially responsible investing and environmental, social and governance investment objectives.
• Asian respondents see customized beta strategies as a possible tool to increase efficiencies within portfolios by eliminating methodology- and weighting-based biases from standard indices.
• North American respondents consider customized beta strategies as a means of gaining exposure to new markets.

"Equity and particularly fixed income standard indices may fall short of the level of exposures institutional investors prefer for smaller, emerging markets," said Kevin Hardy, managing director, asset management, Asia-Pacific region, Northern Trust. "We have seen Asian investors that want to focus their investments in emerging markets or developed Asia markets increasingly exploring customized index management strategies to achieve their investment goals, contributing to the growth of bespoke indices in the region."

About the study

Northern Trust engaged Greenwich Associates to interview 121 institutional investors worldwide during August and September 2011. Together, they represent more than US$500 billion in assets, over 2.5 million employees, and are amongst some of the largest and best-known names in Europe, North America and Asia. The study provides insights into the practical implications for institutional investors of the evolving use of index investments in portfolios.

A copy of the white paper is available to download at www.northerntrust.com/morebeta.

END

About Northern Trust

Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of investment management, asset and fund administration, banking solutions and fiduciary services for corporations, institutions and affluent individuals worldwide. Northern Trust, a financial holding company based in Chicago, has offices in 18 U.S. states and 16 international locations in North America, Europe, the Middle East and the Asia-Pacific region. As of December 31, 2011, Northern Trust had assets under custody of US$4.3 trillion, and assets under investment management of US$662.9 billion. For more than 120 years, Northern Trust has earned distinction as an industry leader in combining exceptional service and expertise with innovative products and technology. For more information, visit www.northerntrust.com or follow us on Twitter @NorthernTrust.

Asset Management at Northern Trust begins with listening and leads to answers beyond the expected for our clients. The multi-asset class investment management business is comprised of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Global Investments Japan, K.K., the investment advisor division of The Northern Trust Company and The Northern Trust Company of Connecticut and its subsidiaries which offer investment products and services to personal and institutional markets.

Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A, incorporated with limited liability in the U.S.

The Northern Trust Company, London Branch (reg. no. BR001960), Northern Trust Global Investments Limited (reg. no. 03929218) and Northern Trust Global Services Limited (reg. no. 04795756) are authorised and regulated by the Financial Services Authority.

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CONTACT:

EMEA & APAC:
Sara Murshed, +44 (0) 207 982 2249
Sara_Murshed@ntrs.com
or
North America:
John O'Connell, +1 312 444 2388
John_O'Connell@ntrs.com