The basis of Northern Trust asset managements index development philosophy, Intelligent Indexing®, has been in place since the 1970s. However, as in all investment approaches, index fund management evolves with changes in the capital markets and financial and academic research. Consequently, Northern Trust Asset Managements index fund investment process is continually fine-tuned through rigorous research and diligent analysis of market conditions from which we seek to identify the most cost-efficient and practical applications for our index portfolios.
Our Research and Index Management Process
Northern Trust asset management's global index research effort is at the core of our management process. An integrated, coordinated team of portfolio managers, strategists, and product managers is responsible for our research. Our diverse capabilities reach across asset classes and industries, including equity and fixed income expertise from the U.S., Europe and Asia.
Hundreds of other investment firms worldwide rely on Northern Trusts perspectives and analysis in the fields of index construction and portfolio strategy. We combine top-down, macroeconomic assessments with bottom-up security analysis. To assess portfolio risk, we develop proprietary credit models, conduct exposure analysis and run both stress and scenario testing.
The research process for indexing differs markedly from traditional active management. While active managers may conduct fundamental research and analysis and look for mis-priced securities, index fund managers look to isolate the risks of failing to track the benchmark. Successful index fund management demands continual re-evaluation of portfolio management processes in efforts to ensure that they are appropriately aligned with the realities and ever-changing dynamics of the capital markets and investor needs.
How We Manage Costs
Our approach focuses on the aspects of portfolio construction and trading that have the greatest impact on wealth erosion, and seeks to provide a measurable improvement in investment performance. Working from a single global technology platform, our implementation recognizes that index portfolios must minimize explicit and implicit costs. The extent to which trades are information-exposed vs. hidden determines our research and trading execution strategy. Liquidity dynamically changes, and transaction costs for each benchmark, and its constituent securities, change from day to day. Therefore, the trading approach must integrate dynamic analysis of security-level liquidity to construct trade lists that minimize implementation costs.