This is Faster Forward from Northern Trust Asset
Servicing.
In this podcast, we explore stories, insights, and
lessons learned from leaders and innovators who are
driving the transformation across industries.
I'm Grant Jahnzi, head of client solutions, banking,
and markets Americas at Northern Trust, and I'll
be your host for Fast For Forward podcast
today. Joining me is Melanie Pickett.
She's head of asset servicing Americas at Northern
Trust. And today, Melanie and I will be
diving into our recent global asset owner peer
study titled
asset owners in focus,
which explores how asset owners are navigating investment
strategies,
operational challenges, and emerging opportunities in a dynamic
market.
The study delivers valuable insights designed to help
asset owners benchmark their practices against industry trends.
Melanie, welcome. I'm really excited to have you
here today. Thanks, Grant. We've worked together a
long time, and you've got a lot of
experience with asset owners. But before we get
into the survey, can you give the audience
a little bit of your background? Sure. So
I've been at Northern a little over eight
years, focused first on building out a business
that we call front office solutions, which helps
our asset owners who have complex multi asset
class portfolios
deal with their data management and portfolio management
challenges a bit better.
Since then, I have taken over,
oversight of more and more of the custody
function. So now looking at asset servicing across
both asset managers and asset owners. Yeah. Across
our entire,
client base. And so prior prior to that,
I was actually a client, which is where
you and I first met. I was the
chief operating officer at a large endowment. So
talk about this survey a little bit. You
know, what types of asset owners were surveyed?
You know, what was the breakdown by, type
of client and and region? Sure. So the
goal of the survey is to do it
annually. It's part of our a suite platform,
which is where we're offering content and community
specifically for allocators.
There were a 80
senior leaders,
each with at least a billion in AUM,
but over half of those had over 10,000,000,000
in AUM.
And the largest group of responders were actually
portfolio managers.
80
of those in North America, 60 in EMEA,
and 40 in APAC. And the responses that
we got were across pension funds, OCIOs,
and multi managers, family offices, endowments, foundations, and
sovereign wealth funds. So, really, this is a
good slice of a lot of different asset
owners on a global basis. So as part
of our work to to do these surveys
and to understand asset owners and their approach
to the markets and investments,
how did this survey kind of contrast to
prior ones that we've led? Were there any
new trends that emerged that you saw? Yeah.
I mean, I think it was much more
focused on a couple of key areas. Operational
efficiency
was one thing that we hear all the
time from clients now, and I think that
has to also do with data and risk
management, which we saw come through a lot
in the survey.
Liquidity is top of mind for everyone, and
and that was echoed in the survey certainly.
And the survey was actually,
taken right prior to the election. And so
it's been interesting to sort of see how,
that has certainly played out more for our
clients. And then AI, every client that walks
in the door is looking to know what
each other are doing on AI. And Those
are all big topics. Let's I'm gonna start
with the liquidity one first. It came up
frequently in the survey responses.
And to your point, since the survey was
conducted late last year, it's an even bigger
topic. I see it all the time in
in my conversations with clients.
I was really surprised. I mean, the average
cash balance that the respondents were holding was
11%.
In APAC, it's around 15%
on on average.
What was the some of the key findings
from the the survey on liquidity, and why
is liquidity in focus now? Right. So 60%
of the asset owners in the survey said
that liquidity has become more important than it
had been a year prior. And I think
some of that has to do with volatility.
So asset owners tend to freeze a little
bit when, conditions are volatile just until they
understand where the opportunity sets are and how
much,
illiquidity risk they want to take.
The US political environment certainly has caused a
lot of our asset owners to need more
liquidity
just in some of the challenges facing their
institutions
directly. But I also think more and more
clients are taking their equity exposure on a
synthetic basis, and so many of them will
have cash underneath that,
program, a portable alpha like program. And, and
so we're seeing asset owners increasingly using that
strategy.
So, again, I'm I'm still surprised by how
much cash some of these clients are holding.
Is it because of synthetics or how much
are the private markets and the potential for
capital calls playing into the higher cash balances,
Melanie? Yeah. I mean, some of our clients
and some asset owners certainly have a a
policy restriction, you know, enforcing that they hold
a certain amount of their unfunded commitments in
cash. But we're also seeing a lack of
circularity in,
the cash flow of those assets. Right? So
many of our asset owners will depend on
those GPs returning capital in order to make
their capital calls. Now they're having to fund
them directly from cash. Interesting. I found it
fascinating, the survey, that roughly half of respondents
said that
managing cash was now very much a strategic
Yeah. And I think it's you know, the
interest rate environment certainly has helped. Right? But
we definitely see our clients managing it as
an asset class, which we don't always have
happening. That hasn't happened in years. Yeah. Certainly
a higher interest rate environment is part of
that. So you mentioned volatility. Let's talk a
little bit about volatility and and how that,
you know, respondents are thinking about volatility. So
how are asset owners adjusting their asset allocation
strategies
in the face of increasing uncertainty? What did
you find in the in the survey? Yeah.
I mean, they're maintaining
diversified portfolios. We know that. Right? So the,
you know, fixed income and equity asset allocations,
tend to be where we expect them to
be, although a little higher in The US
again on equities, and equity risk than the
other regions.
There is continued to be a growing focus
on alternatives, and we see that across our
client base no matter what type of shape
or size of the client.
But the nature of the alternative investments are
changing, right? And so we have seen a
dramatic increase, of course, in
direct real estate, direct infrastructure, as well as
private credit.
I think that the other thing that came
out, is that the number is 68%
for hedge funds, absolute return, and other diversifiers.
And I think that number is quite low
probably compared to where it used to be.
And so we have certainly seen that play
out in, you know, hedge fund fundraising,
statistics.
I think the the thing that's happening that's
really interesting is, one, there's an asset allocation
shift happening with respect to looking more at
a detailed level at exposures and thinking about
managing on a total fund basis versus,
you know, a strategic asset allocation where the
buckets were pretty,
large and and broad.
That's part of it. And then I think,
many of our clients have said they can
no longer,
think really long term given how volatile things
are. And so where an asset owner used
to set out a ten year capital markets
assumption and think about their asset allocation, that
way they're starting to think at a lower,
a lower time period. Yeah. We have seen
some tactical shifts that clients are making, especially
in response to some of the secular dynamics
that are emerging in the market. So it's
interesting.
And to your point on the differences in
the some of the regions with their equity
allocation, I remember in the survey,
the North American
respondents had on average 49
of their allocation in public equities versus about
34%
for EMEA. I found that disparity quite interesting.
Yeah. I think some of the institutions that
we serve as clients have aggressive
growth goals, you know, and they're if in
the case of an endowment trying to meet
their spending distribution, but make sure that they're
growing and preserving the capital on top of
that. And so I think that on on
balance, they take a bit more equity risk
than we see in other parts of the
world. Interesting. Yeah. It was a big difference
between those, those two regions. Significant. Let's turn
to cost management now. I mean, that was
another big theme that came out of the
survey that was really fascinating. It was noted
as among the top investment challenges, second only
to optimizing asset allocation strategies that we just
talked about. How are asset owners managing costs?
Where are outsourcing solutions playing a role in
that? Yeah. I mean, I think like any
business these days, they're thinking about how they're
managing expenses,
and many of them have,
limits on FTE that they can hire, and
so they're looking to their service providers more.
We see a couple of shifts. One, we
see clients, looking to have fewer deeper relationships
with service providers, same thing that they're doing
in their portfolio, fewer deeper relationships with investment
managers, really to take advantage of those economies
of scale and take advantage of the breadth
of their relationship.
I think the other thing that we're seeing
is much more, demand for what I would
call middle office services
for asset owners. So in the asset manager
space for decades, we've had an investment office
outsourcing product
that's very specific to the way that traditional
asset managers behave. What we're doing later this
year is rolling out a set of middle
office services that are bespoke to asset owners.
So those services recognize, you know, some of
the patterns and challenges and particular technology and
needs of the asset owners and, will help
them, you know, append or augment their staff
in that way.
So we see that around, things, you know,
on the very back end from things like
reconciliation
and data entry and administration, but all the
way through to in the front office, you
know, a few of our clients going live
with integrated trading solutions, which is our our
outsourced trading offering. Yeah. We're seeing that with
more internally managed portfolios, and the survey talked
about that. I I believe
almost two thirds of respondents manage at least
some of their cash internally,
and around 40% manage some portion of equities
or fixed income
in the public sectors at least internally. And
that's obviously where we've got, I think, of
a a strong ability to support with both
middle office outsourcing as well as outsource trading,
because the goal of those is, you know,
when you manage those internally is cost management.
And the more you can do through outsourcing,
it's gonna even enhance those cost savings even
further. That's absolutely right. You know, we've talked
before about the trend of a lot of
our asset owners thinking about paying the GPS
or the managers for their
IP their IP only and then implementing the
trades themselves,
being able to take advantage of, the ability
to risk up, risk down, you know, or
shift allocations between managers in an in an
easier way. We're definitely seeing that happen across
our largest, more sophisticated asset owners. I think
that trend's still early days too. We'll probably
see more of that of that type of
trend. Let's pivot also to the private market
instruments.
What did the survey find about private equity
and private credit?
So 67%
invest in private equity, 49%
invest in private credit.
We still see a surge in interest,
and that, I would say, has been, you
know, a significant part of some asset owners
portfolios for decades, whereas others are just starting
to dip their toe into it. So our
public funds, for example, may have had statutory
limits,
on their alternative investments in the past. The
long term nature of these investments obviously line
up really well with the large asset owners
needs from an institutional perspective.
Interesting. Did cryptocurrency come up at all in
this survey? Probably the biggest surprise for me,
which it says that 21%
of those who allocate to private markets have
some sort of exposure to crypto or digital
tokenized investments.
Wow. That's awesome. Not expect the number to
be that large based on what we're seeing.
That's really fascinating.
That's a high number. I'm surprised too by
that. I mean, I think, you know, we
saw certainly a lot of interest pre FTX.
I think the FTX debacle really scared a
lot of people from, thinking about how they
can due diligence the risk of the assets.
And so it's been slowly climbing back since
then. Obviously, with the repeal of SAB one
twenty one,
it makes it easier to custody at a
traditional bank like ours, and, I think we'll
see more and more of it. But I
my guess is if we dug into that
21%, it would be largely ETF exposure at
this point. Another topic. You mentioned this at
the outset, AI. Everyone wants to talk about
AI, figure out what everyone else is doing.
So let's talk about AI and technology more
broadly. What kind of general trends and findings
to the survey find about technology and automation?
Yes. So 79% of the respondents are increasing
technology adoption specifically to improve their operational efficiency,
and 57%
are increasing automation.
So what we heard back loud and clear
is the same thing we hear from clients
day to day, which is the act of
managing the data across all of the asset
classes that they're invested in, managing the data
across alternative investments and the really disparate sets
of information they receive from their GPs is
difficult. Just handling the flow of documents and
communications from their GPs is often a big
challenge. And so we've been working to develop
products, obviously, that help our clients with taking
all of that inbound information and making sure
that we digitize the data as much as
we can. That's something we've been doing in
the alternative space for three years or so
now, and we're starting to see it increase
our scale, but also,
increase our quality and our timeliness and our,
data postings to the clients.
Oh, that's great stuff. It's interesting seeing the
how these trends are playing out because the
technology and AI are advancing so much. Yeah.
So I think everyone has the same challenge
in the space, which is the data that
they hold is really confidential.
Right? And so either they've signed contractual agreements
with general partners or investment managers. They know
they're probably sitting on,
some nonpublic information and pieces of the program.
And so I think everyone's grappling with you
can't just throw that stuff into a public
model and, you know, have chat GPT or
something analyze that for you.
I think our institution, no clients take their
their data security, their data privacy very seriously
as do we. And so I think that,
you know, as we see more,
private models,
and private tools around models, I think we'll
see the adoption increase. Like AI agents that
work within a a framework. That's right. Yeah.
Because it's still you know, it's not where
you think it should be in terms of
adoption at this point.
We see things like search on steroids or
we see things where, you know, processes are
automated.
But really getting to the point where we're
using, you know, more predictive tooling in the
act of investment management, we're not there yet.
Well, I look forward to see how this
trend plays out on the next survey that
we do of asset owners because this is
a a hot topic that's emerging and evolving
quickly. Yeah.
Let's, just wrap up a couple more questions
for you. I'm and, you know, it was
a great regional survey. You talked about that
at the outset. We got respondents from around
the world.
Did you notice any of the regional differences
other than we talked a little bit about
the equity side of things? What was the,
what other types of regional differences did the
survey find that stood out? So cash was
another big one. The cash target policy targets,
within EMEA and APAC were nearly double that
of North America. So in general, that dovetails
back to taking more equity risk right in
in North America. I think, you know, this
one wasn't surprising,
but the numbers were a little surprising to
me. So when it comes to sustainable investing,
28%
of North America's energy portfolios are clean or
renewable energy types. That number jumps up to
40% in APAC, 50 Percent of EMEA energy
portfolios or natural resources portfolios are clean or
renewable energy. And then it's the same in
real estate. So if you ask, you know,
we ask clients how much of your overall
real estate exposure is in energy efficient or
sustainable real estate. That number is 20% in
North America. It's 3031%
in EMEA and APAC, respectively. So really big
differences that we can see,
in what you would have called,
ESG investing or sustainable investing. Not surprising, but
very interesting nonetheless to see that type of
difference. Yeah. Yeah.
Anything else you saw surprising from the survey?
Anything else that jumped out to you worth
mentioning? We talked a little bit about the
crypto finding. I still am noodling on that
one a little bit and thinking about how
our clients are taking that exposure. We've had
plenty of clients talk to us about
accepting gifts or maybe getting distributions from their
private equity funds, but we haven't seen really
anyone take a policy target
strategic asset allocation to the asset class. So
this one is one to watch for sure.
Interesting.
Looking ahead, any one trend you're watching closely
or you're interested to see how it plays
out in our next survey, or even in
the coming years, Melanie? Yeah. I think just
the geopolitical environment is changing the nature of
asset allocation. So first and foremost, we see
clients focus much more on country specific, less
region specific allocation.
That's certainly changing the way we think about
creating funds or creating investment portfolios for clients.
I think that's gonna be exacerbated by some
of the tax treaty issues that we're seeing
now crop up as a result of the
stance,
of The US and, you know, certain negotiations.
Right? So I think that our clients are
looking much more at after tax or tax
advantage investing than they ever have before. These
are largely not for profit
or nontaxable
institutions,
but they are facing, on a number of
different fronts, significant increases in tax.
Oh, Meli, that was fascinating having you here
today. The some of the insights from this
survey really, really were interesting for me to
read and to learn about.
And I would say to, you know, to
you, I'm looking very much forward to the,
to the next survey that we do and
to see how those trend lines and those
results change. Great. Thanks, Grant. And I would
say to our listeners today as well, it's
worthwhile to get a copy of this, so
please reach out to your Northern Trust relationship
manager.
A lot of really good insights, and we've
only just scratched the surface in our discussion
today. Thank you all for tuning in to
Faster Forward by Northern Trust Asset Servicing. Thanks
for you, Balonique, to come today. Thanks, Grant.