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Northern Trust Adds Multi-Manager Funds to Target Wealthy

Northern Trust's three new open architecture, multi-manager mutual funds are the first in a series aimed at helping wealthy investors better allocate their assets with smaller investment managers.

The funds give investors access to portfolios of external investment managers previously available primarily to institutional investors. The portfolios feature a manager-of-managers approach in which the Chicago company's Northern Trust Global Advisors investment advisor division allocates assets to external sub-advisors. Called the Northern Multi-Manager Equity Funds, the offerings focus on small-cap, mid-cap, and international sectors.

Andrew C. Smith, chief investment officer of Northern Trust Global Advisors, said it plans more multi-manager funds for other equity investing styles.

"If you divide the market into nine style boxes - small-, mid- and large-, and value, core, and growth - ultimately it would make sense to try and fill those boxes," he said. However, at this time, Northern Trust doesn't have a time frame for getting all of those boxes filled.

The first three portfolios focus on areas in which wealthy people typically do not invest enough, Smith said. The products will be offered initially to Northern Trust customers, but eventually they could be distributed widely, he said.

Individual investors are interested in niche areas of their portfolios, because it is becoming increasingly difficult for financial advisers to outperform the benchmarks in portfolios' large-cap core sections, he said. "They are realizing that there is a lot more alpha to be had with small-cap and international investments.

"Even in the biggest portfolio there are gaps," Smith said. "It seems you run out of capital before you get to niche areas where you can really add a lot of value."

The three funds raised Northern Trust's no-load domestic and international mutual fund total to 36. Investors moved $300 million of assets from other Northern Trust products into the new funds on June 23, the first day they were offered, Smith said.

The global advisory unit manages $33.5 billion of assets.

The funds require a minimum investment of $2,500, which analysts said is very low considering that Northern Trust usually works with wealthy customers. Smith said all the company's mutual funds are offered at low minimums to give financial advisers more flexibility.

"We found as people's situations get more complicated, they have 50 or 60 accounts in these large families," he said. "These lower thresholds give us the flexibility to allocate to all accounts of all sizes for these wealthy individuals."

Some investment products, such as managed accounts, are offered at such high minimums that it is "difficult to impossible" to properly allocate across all style boxes, Smith said.

The Money Management Institute, a trade group, says the average managed account requires a minimum investment of $100,000 to $150,000.

According to Smith, in a managed account, people invest their assets with a single manager, who perhaps has a single specialty, but in a multi-manager fund, three to four managers, who may each specialize in an area, are allocated into a single product.

Typically, small managers would rather work with institutional investors than individual ones, he said. "A talented small-cap manager won't do separate accounts, because they don't need to. It is such a hot area of the market, [but] they just don't have the capacity," he said. "They'd rather work with institutional investors or one manager, like Northern Trust. They like dealing with us, and we can negotiate capacity."

There is still a role for the separately managed account, Smith said. Investors can use them for the tax-sensitive portions of their portfolios, but to "get to the smaller wedges" of the portfolio, multi-manager mutual funds are handy. His unit "manages the risk to make sure we are not making big sector bets, big regional bets or big currency bets," he said.

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