Northern Trust Corp. doesn't expect the stunning political unrest in the Middle East to become a full-blown economic crisis. But the big money manager is hedging a bit — just in case.
"It is folly to believe one can boldly predict the future course of events in North Africa and the Middle East," said James McDonald, Northern Trust's chief investment strategist, in a note to clients late Thursday.
The Chicago bank and trust, which manages about $644 billion for institutions and wealthy individuals, has sold off some stocks in emerging markets. Meanwhile, Northern Trust is bulking up on stocks of big U.S. companies and energy producers, while hanging on to an oversized holding of gold.
The bank's headline investment portfolio holds 24% in U.S. stocks and 5% in emerging markets.
Northern Trust's shift in investment strategy is one example of how big investment managers are sizing up the escalating turmoil in the Middle East that has threatened in recent days to bloom into a full-blown economic crisis.
Saudi Arabia "is the absolute key swing factor" in determining whether the Mideast crisis eventually becomes an energy crisis for the world's economies, McDonald said in an interview. The relatively stable Arab monarchy, he said, has the most unused oil-pumping capacity among nations in the Organization of Petroleum Exporting Countries, a key factor if the unrest in oil-rich nations like Libya or Algeria silences their crude-oil spigots.
To cushion the blow if the region spirals out of control, Northern Trust is emphasizing stocks in big U.S. companies and energy producers. The biggest domestic companies do about 40% of their business outside the U.S., giving them access to the global economic rebound but from safer confines.
Energy companies in the U.S. could see much bigger profits if the political turmoil overseas drives up energy prices back home.
McDonald said another reason to pare back on emerging-market stocks is the rising threat of inflation in those areas as central banks struggle to keep growth from becoming too frothy. "There is increasing risk that central banks" in those markets "are behind the curve … combatting growth and inflation," he said.
Although Northern Trust uses a variety of investment strategies with clients, investors and advisers can track the bank's own prevailing investment strategy by watching its institutional Tactical Asset Allocation fund. The fund has returned an annualized 1.34% so far this year, and 4.1% over the last three years, according to Morningstar.
As part of its main investment strategy, the bank, after much deliberation, decided to keep its outsized holdings of gold — currently 6% of the portfolio. There are reasons to sell, as gold has recently rebounded and is nearing highs.
"We debated it each of the last couple months," McDonald said.
But should the events in the Middle East lead to a full-blown economic crisis, investors could once again seize on gold to safequard their portfolios. In the end, McDonald said, "we still very much like having this hedge in place."
