The scale of Northern Trust's global custodian operations is impressive. The Chicago-based company has long-standing relationships with some of the largest central banks and sovereign wealth funds in the world, servicing more than $500 billion in assets under custody for such clients.
Sovereign customers speak highly of the advantages of Northern Trust's scale, but they speak of other strengths as well. Northern Trust's clients cite several key reasons for doing business with the firm. They refer to its technical excellence – it has a tech budget of $2.2 billion to invest between 2014 and 2016 – the intellectual quality of its staff, especially in dealing with ever more demanding regulatory requirements, and its long-term focus and commitment to clients and the industry. One particular focus in the past year was the development of investment risk and analytical services.
A pattern to its business activities has emerged. Northern Trust establishes a strategic relationship with a key client in a country – often an official institution – then builds up its local presence over time. It has done this on a significant scale in Australia, Saudi Arabia, Malaysia, Sweden and South Korea. The next targets could be the Philippines and Taiwan. While the Chicago-based company has an important presence in mainland China, it also forged a 'strategic collaboration' with the Bank of Taiwan in 2015. This will enable institutional investors to gain access to the bank in the Taiwanese market, and local entities to use Northern Trust's global custody and asset servicing capabilities. It also set up an operations centre in the Philippines.
This sort of focused effort in one country ensures Northern Trust is well positioned for sudden market developments. For example, Northern Trust has eight staff in Riyadh and plans to double this number over the next 18 months. In addition, Northern Trust has recently built up its performance reporting and ability to manage Sunday trading in the Saudi local market, which opened up to foreign investors in 2015.
Northern Trust's on-going relationship with Australia's Future Fund (winner of Sovereign investor of the year) during the past near-decade highlights the depth that its relationships can achieve. Fending off domestic and international competition in a tender and due diligence process, Northern Trust became the A$118 billion ($85 billion) sovereign wealth fund's global custodian back in 2007 and now employs well more than 100 staff in Melbourne. "Northern Trust took an innovative approach to developing enhanced capabilities to support our currency hedging and performance reporting needs during our early years," says Gordon McKellar, chief operating officer at the Future Fund.
Compliance analyst, Northern Trust's proprietary compliance monitoring system, is currently undergoing its "biggest redesign" since its inception, says one person familiar with the project. The aim is to integrate reporting of compliance, performance measurement and risk on one platform. An interdisciplinary team from Northern Trust is ensuring the system is updated "in anticipation of increasingly complex investment compliance guidelines in the near future".
Northern Trust's team has impressed the Future Fund with its strong client support and "deep expertise and a solution-focused approach", according to McKellar. "All their locations pull together as one team to deliver seamless services to us," he adds. "It's pretty special." This level of engagement may help to explain why in 2015 Northern Trust has been re-appointed for a significant custody mandate from a major central bank with more than $90 billion in forex reserves.
Northern Trust has secured an increasing amount of work with institutions in sub-Saharan Africa, as well as with other developing world clients. This support is especially important as central banks have faced stresses on their reserve finances due to yield compression from traditional reserve assets, expectations of a rise in US interest rates and depressed commodity prices. Oduetse Motshidisi, deputy governor at the Bank of Botswana, praised the custodian's "fantastic service" on a range of tasks, including performance measurement and attribution as well as its efforts in building the central bank's capacity. Northern Trust also lays on a "very helpful" training programme for the bank's staff, according to Motshidisi, with recent training focused on benchmark construction and fixed-income investment.
One particular attraction of Northern Trust is the strength and depth of its technical expertise in the IT field. Its systems are "very good and up-to-date", Motshidisi says. Every time the Bank of Botswana conducts one of its periodic reviews of its relationship with Northern Trust, the manager says "we come to the conclusion that they invest in the right things: particularly technology".
The Bank of Uganda, meanwhile, has adopted Northern Trust services for compliance, performance and risk sensitivity analysis purposes. Charles Mugisa, head of financial reporting at the Ugandan central bank, calls Northern Trust's services "extraordinary". The Chicago-based custodian has helped the African central bank to develop a 'dashboard' offering oversight of external asset managers with 'passport' software, enabling officials to call up interim reports at any time in addition to the usual audited monthly reports. Northern Trust provided dedicated training on its software package, so that the interim reports have become "more meaningful to us", Mugisa says, adding that the interim reports are "very little different" from the monthly ones, due to Northern Trust's "excellent reconciliation capabilities".
The reassurance that comes from having Northern Trust's support behind it has enabled the Bank of Uganda to design a major "overhaul" of its strategic asset allocation system. The radically changed system is currently before the Bank of Uganda's board for approval. Without Northern Trust's systems to support them, Mugisa says, the Ugandans would have felt less comfortable going ahead with the change. Northern Trust also offers guidance to accounting, financial markets, risk, foreign exchange, payments and other staff, for example via training courses run in London and on site, to help them to develop holistic governance approaches to ensure effective oversight of reserves.
"It's not just about custody. It is about providing a governance structure to manage their FX reserves," says Edgar D'Mello, a senior vice-president at Northern Trust. "They know when interest rates go up that they will incur some unrealised losses, so they want to know that asset managers are doing everything they can to minimise those losses and manage the duration curve by leveraging on our technology and reporting."
Northern Trust has secured new work as a custodian for a relatively new sovereign fund, of several billion dollars, invested on behalf of an African country. A total of $3 billion will be reinvested back into Africa over the next five to seven years via a series of special purpose vehicles and limited partnerships, with Northern Trust acting as custodian in addition to offering its advice on the creation of the funding vehicles. It has done some "excellent work on portfolio and cash management", according to a manager who works for the fund with its services coming at a "competitive rate". The firm's team has been undaunted by the complications of providing custodian services for a portfolio split first into seven and then into 14 segments, the manager adds. The segments are believed to include private equity investments in agriculture, infrastructure, healthcare and hotels.
The Central Banking awards were written by Christopher Jeffery, Tristan Carlyle, Daniel Hinge, Arvid Ahlund, Dan Hardie and Rachael King.