Northern Trust Corp. is expanding its offshore funds business to provide more investment management services to foreign clients and prospects.
The Chicago-based banking company launched a U.S. dollar-denominated money market mutual fund last month. Domiciled in Dublin, it joins a U.K. sterling-denominated fund that opened in April 1996. Combined, the two portfolios have $800 million.
Though the funds represent a drop in the bucket for Northern, which manages $196 billion worth of assets for institutional and individual investors, they give the bank an opportunity to take on more business from a growing foreign clientele, according to vice president Arch King.
"We have a non-U.S. client base from the custody business," said Mr. King, a product manager in Northern Trust's global investments area. "That's one of the fastest growing parts of our business."
"It's an opportunity for us to introduce ourselves as an investment manager," he added.
Observers said foreign institutional investors, whether they are pension funds or corporations, are demanding more alternatives for their cash management needs.
Some may have short-term cash management demands that cannot be met in Europe, which has a relatively small commercial paper market, said Peter Marshall, director of the offshore and international mutual funds practice at Ernst & Young, New York.
Short-term management of cash can be handled efficiently by buying shares of a money market mutual fund, which offer better returns than deposits. As a result, investment managers have rolled out a slew of offshore money market mutual funds over the past few years.
"And then Barings gave it a boost," Mr. Marshall said. Barings Group PLC, the United Kingdom's largest bank, collapsed in 1995, leaving scores of cash depositors in the lurch.
Cash depositors in a failing bank are general creditors during bankruptcy proceedings. But money market mutual fund shares are securities and therefore more easily protected investments, Mr. Marshall said.
Mr. King of Northern said general awareness overseas of currency risk management is also driving demand for money market mutual funds.
"There have been a number of situations raising the question of whose balance sheet do you want to be exposed to," he said. "Most of the banks in the world are just fine, but the ones that aren't you don't want to get caught in."
Just as the money market funds are marketed domestically, the Northern offshore funds are positioned as an outsourcing option for institutions that do not want to manage risk internally.
"You're hiring someone else to do the diversification and the credit research for you," Mr. King said.
Offshore money market funds in Europe should be easier to operate after the currencies of individual countries convert to the shared euro denomination, according to Mr. Marshall.
"It's very hard to get critical mass. Being able to offer a euro fund would be a much more attractive alternative than having lots of small European currency funds," he said.
Mr. King agreed. "That's where we're headed as a firm and with this product, and where the clients are headed," he said.