N o r t h e r n Tr u s t
CUSTOM PORTFOLIO CONSTRUCTION
Creating Powerful Manager Combinations
Northern Trust To design a diversified portfolio tailored to returns, analyzing market correlation and
your risk/return needs, Northern Trust Global volatility. This information drives our efficient
Advisors (NTGA) uses modern portfolio theory frontier and provides a broad framework for
disciplined, and leverages industry-leading manager designing an optimized portfolio to accom-
research and analysis tools. modate your specific needs.
Northern Trust’s manager of managers
Investment Manager Selection
process before practice has been researching and monitor-
ing investment managers for client programs To understand each manager’s unique
for more than 25 years. In that time, we have investment process and discipline, we use a
portfolio solution. developed the skill, resources and processes rigorous, uniform process employing both
to research, compare and select money qualitative and quantitative tools. We develop
managers worldwide. Today, we continuously a qualitative sense of how different managers’
track approximately 5,000 global money styles complement each other before testing
managers with specific investment specialties, statistically to determine which manager
recommending fewer than 300 to clients. combinations provide the most compelling
Asset Class Fulfillment
Before recommending a portfolio solution to
you, Northern Trust completes a disciplined, Strategic combinations of managers are used
four-step process. to fulfill your asset allocation objectives. Each
■ Asset Allocation Analysis investment manager has a style or philosophy
that works better in certain financial conditions
■ Investment Manager Selection than others. Using a single manager in any
■ Asset Class Fulfillment asset class can leave you vulnerable to style
risk – fluctuations in performance as financial
■ NTGA System of Interactive Testing and conditions vary.
Evaluation (NSITE) Combining complementary managers can
help reduce portfolio volatility and provide
Asset Allocation Analysis
enhanced returns. Style- and capitalization-
Our Investment Policy Committee, made neutral portfolios help manage risk by
up of senior asset management professionals, combining managers whose approaches have
reviews and approves investment policy for low levels of correlation with one another.
all clients. The committee forecasts market
You will receive a To position your portfolio for success in changing market environments and to gain further
insight into the true structure of the portfolio, each potential solution goes through a rigorous
series of tests. These tests help us fine-tune various allocation scenarios so as to understand
dation only after a and manage sources of risk. If a particular allocation scenario triggers a flag in one stage of the
analysis, we adjust the allocations before moving on to the next stage.
series of rigorous
Returns-Based Analysis. Northern Trust goes beyond common industry practices to analyze
tests have been
R E T U R N S - B A S E D A N A LYS I S
C O M M O N I N D U S T RY P R AC T I C E NORTHERN TRUST PROCESS
Review absolute and relative performance on a Analyze a broad set of absolute and relative
cumulative and calendar year basis. statistics.
Measure information ratio and Sharpe ratio. Perform ratio analyses on both a cumulative and
Risk is defined by tracking error and standard
deviation. Confirm style bias through regression and
Low-correlated products influence selection.
Examine up-market capture and down-market
Look for consistency across time periods and
Measure batting averages (percentage of times
the portfolio has beaten its benchmark) for returns
as well as a variety of other statistics and ratios.
Holdings-based Fundamental Holdings-Based Analysis. This from style or capitalization. We evaluate a
stage of testing measures manager skill in broad set of historical and forward-looking
security selection, based on three core beliefs. fundamentals. These include the same meas-
manager skill in ■ Fundamentals, the key drivers of a manager’s ures the underlying managers would consider
investment style, are more sensitive than when selecting securities for their portfolios,
returns to changes in manager allocations. the most common of which include:
■ Price-to-earnings ratio;
■ A manager following a strict style discipline
■ Price-to-book ratio;
will display strategic fundamental traits.
■ Skill in security selection is a significant
■ Earnings growth; and
source of a manager’s excess returns.
■ Return on equity.
The goal of holdings-based analysis is
to leverage each manager’s stock selection
expertise, while managing inherent risks
Holdings-based analysis provides a truer Stress testing involves a series of analyses. Stress testing
picture of capitalization, sector, regional and ■ Time period forecasts portfolio
country bets. A manager’s style bias can be
determined by the over- or underweights of sensitivity to interest
■ Scenario testing
these factors and fundamentals. This analysis
rates, inflation and
helps determine whether a manager’s perform- ■ Risk decomposition
ance is driven by one of these factors or by ■ Alternative manager combinations market cycles.
skill in stock selection. If we discover risks or
unintended bias in the overall solution, we Once again, if risks or unintended biases are
readjust the manager allocations and retest noted, we adjust the allocations and re-evaluate
the portfolio with returns-based analysis. the portfolio through returns-based and
Stress Testing. Once we are confident with holdings-based analyses.
the results from the returns-based and holdings- It is only after successfully completing
based analyses, stress testing is conducted all phases of the NSITE process that Northern
using proprietary and third-party analytics. Trust will recommend a portfolio to you.
Stress testing forecasts the portfolio’s sensi- Leveraging Northern Trust’s expertise in
tivity to interest rates and inflation, as well portfolio construction provides you with a
as its strengths and weaknesses in different well-structured, diversified solution designed
market environments and cycles. to offer the highest potential return for your
risk tolerance targets.
■ Bear FOR MORE INFORMATION
■ Speculative To learn more about portfolio construction,
please contact Waz Saluchok, 1-866-791-7396,
■ Growth-, value- and capitalization-driven
This material is provided for informational purposes only and does not constitute an offer or
solicitation to purchase or sell any funds. Information should not be considered investment advice,
a recommendation to buy or sell any funds or an endorsement of any underlying managers’
Information has been obtained from sources believed to be reliable, but its accuracy and
interpretation cannot be guaranteed. Information is subject to change without notice. Any person
relying upon this information shall be solely responsible for the consequences of such reliance.
There is no guarantee that the investment objectives of any fund or strategy will be met. Risk
controls and asset allocation models do not promise any level of performance or guarantee against
loss of principal.