Northern Trust Global Investments, Chicago, will become the third largest manager of institutional indexed assets with the acquisition of Deutsche Asset Management's $120 billion passive and enhanced indexing business.
Northern Trust Corp. has agreed to buy Deutsche's indexing business for $260 million. It is one of the largest-ever transactions involving indexed assets and it is the largest acquisition in Northern Trust's history.
Jim Creighton, global chief investment officer for passive management at Deutsche, will become global CIO for quantitative management at Northern Trust, a new position that will include passive and enhanced indexing. Judy Bednar, who oversaw Northern's indexing business as global chief operating officer, will continue to run the Chicago quantitative office, reporting to Mr. Creighton.
The Chicago-based firm's overall assets jump to $447 billion, making it the ninth largest U.S.-based money manager. About $180 billion of that is worldwide indexed assets, making NTGI the fourth largest indexer overall and third largest in terms of institutional indexed assets.
Northern moves ahead of Vanguard Group, Valley Forge, Pa., while Barclays Global Investors, San Francisco, and State Street Global Advisors, Boston, remain one and two, respectively.
Stephen Timbers, president of NTGI, said the acquisition gives Northern Trust the size it needs to compete with the top two indexers. "In the indexing business, it is important to have size," said Mr. Timbers. Prior to this transaction, it was difficult for Northern to get into indexing searches for large pension funds with sizable mandates because the firm didn't have enough indexing assets under management.
Mr. Timbers also said the Deutsche indexing business fits well with other services Northern Trust offers, such as transition management, custody and securities lending.
As part of the deal, Deutsche's 29 investment professionals in indexing portfolio management staff will join Northern Trust, Mr. Timbers said. Portfolio managers will work in Northern's New York, London and Tokyo offices.
Northern's willingness to retain the staff was one of the keys to Deutsche doing the deal, said Curt Kohlberg, president of Wellesley, Mass.-based Chatham Partners and strategic adviser to Deutsche. "The investment process and day-to-day operations will not change," he said.
Mr. Kohlberg also cited Northern Trust's strong senior management and reputation for service quality.
"They are clearly long-term players in the institutional asset management business and view passive management as strategically important to their overall investment management."
His firm also advised Deutsche's recently announced custody deal with State Street Corp., Boston.
Streamlining Deutsche
For Deutsche, the deal is part of a plan announced in May to concentrate on core competencies, divesting businesses that didn't fit into its long-term plans to concentrate on active management.
Joel Gomberg, analyst at William Blair & Co., Chicago, said the deal makes good strategic sense for Northern Trust because it gives it the size the needed to compete in the indexing business and the opportunity to cross-sell other parts of its business.
"Northern Trust is historically not an acquisitive firm," said Mr. Gomberg. He added, however, that executives there have made the most of the few acquisitions they have done.
Northern entered the indexing business in 1997 with its acquisition of American National Bank's investment management business, which had $30 billion in indexed assets. Deutsche acquired its passive management business in 1999 when it bought Bankers Trust Co. Deutsche manages about $25 billion in indexed assets for Fidelity Investments. Vin Loporchio, Fidelity spokesman, could not be reached for comment on the deal with Northern Trust.
