Asset management unit president sees ETF, quant strategies as path to profits
Shundrawn Thomas, the new president of Northern Trust Asset Management, says he has made it a priority to build both the money manager's quantitative investment business and its ETF operation over the next few years.
The 43-year-old executive, who began his new role on Oct. 1, replaced Stephen N. Potter, who became vice chairman of parent company Northern Trust Corp.
Northern Trust Asset Management had total assets under management of $953.7 billion and institutional assets of $741.5 billion as of Sept. 30, according to company data. As of Sept. 30, it held more than $500 billion under management in passive equity and passive fixed-income strategies, according to Northern Trust.
But it is a much smaller player in quantitative investment strategies and exchange-traded funds, which can have higher fees than passive strategies. Northern Trust's quantitative, factor-based investment strategies account for $19.7 billion in assets under management, although the number rises by another $40.2 billion, if tax-advantaged equity strategies are included.
"I'm not going to put a specific number on it today," Mr. Thomas said in an interview at Northern Trust's offices in Chicago. "If you ask me as we look out over the next five years ... do I expect a significant growth … on those quantitative strategies? Absolutely."
Mr. Thomas also sees continued growth of Northern Trust's ETF business, which today accounts for $15 billion in assets.
First ETFs failed
The company's first push into ETFs in 2008 was a failure. The 17 ETFs raised a combined $33 million, and were closed in February 2009, just 10 months after the first investment vehicles were introduced.
In 2010, Mr. Thomas, then president and chief executive of Northern Trust Securities, was given the assignment to build a new lineup of ETFs. Under Mr. Thomas' direction, who became managing executive and head of the exchange-traded funds group, Northern Trust Asset Management launched a new series of ETFs in 2011.
But Northern Trust also faces a host of competition from other managers building their ETF businesses, including the three providers that dominate the global market: BlackRock (BLK) Inc. (BLK)'s iShares, Vanguard Group Inc. and State Street Global Advisors. The three, with more than $2.5 trillion in ETFs combined, account for about 70% of the global ETF market.
As of June 30, Northern Trust ranked as the eighth-largest ETF provider globally, Pensions & Investments' statistics show.
"So one of the key priorities that we will have is the growth and success of that business," Mr. Thomas said. "We don't set out to say we need to be the biggest. There's some people who have a lot of years head start."
Twenty-three of Northern Trust's 25 FlexShares ETFs are based on alternative, custom, non-cap-weighted indexes, an approach Mr. Thomas said is intentional to avoid competing with the mainstream traditional index ETFs offered by the big three providers.
"You're going into a competitive environment, you would never want to sort of compete with an incumbent on their terms," he said. "So successful strategy would always say, to the extent that you can, tilt the board or move toward something that favors your strength; you would always want to do that."
Not all of Northern Trust's ETFs have gathered significant assets. Several don't exceed $10 million, but Mr. Thomas said the firm is committed to keeping them open in the hope that longer-term investment track records will attract more money.
His plan for expanding the ETF franchise focuses on organic growth rather than acquisition, illustrated by the path taken by Invesco (IVZ) in its recent purchase of Guggenheim Investments' ETF unit. "There are more acquisitions, just generically speaking, in the industry that have either failed or destroyed value than there are ones that have created" value, Mr. Thomas said.
Northern Trust has built a niche with its ETF strategies, said Todd Rosenbluth, director of ETF and mutual fund research at investment research firm CFRA, New York.
"Their products are relatively distinct in the marketplace, especially some of their larger, more successful strategies," he said.
Mr. Rosenbluth said Northern Trust's largest ETF, its global natural resources fund with $4.7 billion in assets, uses a unique thematic approach investing in energy, water, food and materials companies.
One issue Mr. Thomas won't have to deal with in a major way as president of Northern Trust Asset Management is outflows from active equity strategies, a common problem for many managers today. Only $900 million of Northern Trust Asset Management's more than $900 billion under management is in active equity strategies, firm statistics show.
"No doubt about it, their mix is definitely more situated to where the world is going," said equity analyst Glenn Schorr, senior managing director and senior analyst at Evercore ISI in New York.
Frederick Waddell, CEO of Northern Trust Corp., said in a separate interview that the bank decided in the early 2000s to reduce emphasis on active equity management.
"We found it was harder and harder to compete on the active ... and large institutional investors were more and more gravitating to an index," Mr. Waddell said.
In 1997, Northern Trust brought American National Bank's index business, and then in 2003, it purchased Deutsche Bank's index business. But, Mr. Schorr said, Northern Trust executives have to figure out how to successfully build higher-fee businesses such as smart beta and non-traditional index ETFs. He said the FlexShares ETF business has been growing, but globally it "is still a small part of the overall pie."
Northern Trust, he said, not only faces intense competition among other ETF providers but also among firms that offer factor-based investment strategies: "It's a crowded world."
Northern Trust competes with a number of firms with larger factor-based strategies, P&I statistics show. Dimensional Fund Advisors is the largest factor-based investment firm with more than $450 billion in factor-based strategies as of Dec. 31, 2016, followed by BNY Investment Management and AQR Capital Management LLC, both with more $150 billion. Mr. Thomas did not offer specifics as to how Northern Trust plans to garner more assets, but said ETF offerings and marketing and consultant relations efforts are being expanded.
Another potential issue Mr. Thomas could be dealing with Northern Trust's recent announcement that it plans to cut $250 million in expenses companywide by 2020. Northern has not said if the workforce will be reduced.
"There's no program to speak of that we have announced with respect to layoffs or anything like that for asset management," he said. "Our direction right now is focused on how we get more of the right talent in the right place in asset management."
Northern Trust Corp. does not break down revenue or profits specifically from its asset management group, but says in the 10 years ended Dec. 31, 2016, 57% of its revenue came from institutional clients using asset management and custody services.
Mr. Waddell credited Mr. Thomas with building Northern Trust's ETF business successfully, after its failed first start.
He also said Mr. Thomas is the first person of color in 128 years in the senior management group at the bank and will help diversity efforts. "So, if you're a young person of color coming into the financial services industry and at a great company like Northern you don't see people like you at that (senior) level ... you might say well, what chance do I have?" he said.
While Mr. Waddell said Mr. Thomas will send a powerful message helping with diversity efforts at Northern Trust, he said Mr. Thomas was ultimately chosen for the top asset management spot because of "his talent and his capabilities."
Mr. Thomas said he understands his appointment will offer "some encouragement" to building a more diverse workforce at Northern Trust.
"I don't consider myself special per se, but I do know that I have some unique opportunities to have a positive impact."