Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Australians pessimistic but have good pension system
(Pictured: Carl Tannenbaum)
Carl Tannenbaum, senior economist and vice president at Northern Trust, seems to think Australians are a pessimistic bunch.
“For a country that hasn’t had a recession in 22 years which, relative to a lot of other developed countries, is really doing quite well, [with a] strong banking system, a pretty well balanced economic mix but if I read the papers it seems like the country is going to heck in a hand basket,” he says.
“How can things be so good on the surface and so bad underneath?”
That said, he sees some of the same challenges Australia is facing, in terms of how the country is positioned for the future, all over the world.
“We’re all getting older and societally that means that some of the promises made to the elderly are coming due and are we in a good position to honour those promises and if not, what steps have to be taken so that we ensure that we don’t have people impoverished during their retirement,” he says.
He likes the mandatory nature and superannuation guarantee amounts of the Australian superannuation system, and thinks it has done a much better job of dealing with these problems than the US.
“Of course the other element is asset allocation and people here in Australia have the freedom to choose their super fund and that gives them a certain amount of discretion. Hopefully the managers manage the money wisely.”
He prefers systems that take that decision out of the hands of pensioners as well and is a big fan of the New Zealand system as it has complete investment discretion.
The New Zealand Super Fund (NZSF) has been a client of Northern Trust for custody, since 2007, and asset management, since last year.
Tannenbaum says the NZSF has done a good job of creating a structure that is much less vulnerable to political pressure.
“So there is a board, but they are very focussed on their long term investment objectives and they operate very much like one of our big investment fund clients,” he says.
The Australian operation has grown massively since Northern Trust first won the Future Fund custody mandate in 2007, and local operations now employ 90 staff, with another three to five to be added shortly, according to Australian head of sales and relationship management Angelo Calvitto.
William Mak has just been appointed head of the Asia-Pacific region for Northern Trust and Teresa Parker, who was formerly in that position, will move to Chicago to take up a key strategic role within the company.
Over the past five years, Northern Trust’s assets under custody in the Asia Pacific region have increased by 14 per cent annually (compounded) and assets under management for the firm in the region have grown by a 11 per cent annually (compounded).
