Northern Trust Corp. is putting new muscle behind its investment operations outsourcing business to gain scale globally in the wake of the market meltdown.
"This has been a service that historically has been bought, not sold," said Dan Houlihan, hired in February as global head of product and strategy for the Chicago banking company's investment operations outsourcing unit. "Because of the evolution of the products and market dynamics, that's no longer the case, and we're being very proactive about trying to find the right partners."
Northern Trust created Houlihan's position after identifying investment operations outsourcing as a strategic growth area, Houlihan said. Investment operations outsourcing provides middle-and back-office services tailored to individual investment managers.
The services typically include everything from trade management to portfolio accounting to investor reporting, all of which occurs after trade execution. There are a couple of reasons Northern Trust's leaders believe the time is right for a push in the investment operations outsourcing space, Houlihan said.
One is the market's dramatic decline, which has slashed assets under management and pressured investment firms' profit margins. Secondly, the technology that investment management requires — particularly to deal with complex transactions like those involving over-the-counter derivatives — is steadily becoming more expensive and complex.
The required capital investments, and the diminished asset bases they must be spread across, have led to what Northern Trust sees as increased interest among investment managers for its array of services, according to Houlihan.
Northern Trust has seven full outsourcing clients and nine more that use the company for select services, Houlihan said.
Its assets under management are about $300 billion and they range across product types and asset classes from domestic equities and fixed income to complex derivatives.
Northern Trust's investment operations outsourcing clients include Hermes Fund Managers Ltd. of the U.K. and Julius Baer Investment Management of New York.
Though Northern Trust's investment operations outsourcing grew out of its custody and fund accounting services, the business has evolved to the point where "we very much see" investment operations outsourcing "as a stand-alone business," Houlihan said.
Northern Trust is currently in the second tier of custody banks behind the likes of Bank of New York Mellon Corp. and State Street Corp., which are generally seen as having the most clients and the most assets, respectively, according to Andrew Hunter, a partner with Barrington Partners in Boston.
Northern Trust is making its push at a time when investment managers are changing the way they look at outsourcing, Hunter said.
Until recently, he said, investment managers usually turned to an outsourcing provider when forced to by circumstances. "They needed to get into new markets, or maybe they have a portfolio of out whack."
Now, he said, providers' platforms have matured, and outsourcing decisions are more often based on a desire to upgrade a company's technology and become more efficient.
Using an outside partner frees investment managers to focus on investment management, because they do not have to manage a technology infrastructure budget or worry about back-office staffing levels. And outsourcing may be less expensive in some cases, Hunter said.
Houlihan said the complexity of investment managers' middle-office operations has been driven by the evolution of financial products such as OTC derivatives.
"We've invested heavily to improve our derivative processing capabilities," he said.
Houlihan, 42, was the president of the advisory firm Citisoft in North America. In that role he advised investment managers and service providers on outsourcing.
Houlihan, who reports to Peter Cherecwich, Northern Trust's chief operating officer for corporate and institutional services, will set the overall global strategy for investment operations outsourcing and align it with short-term plans.
A big component of investment operations outsourcing's service will be strategic advice about everything from entering new global markets to improving their profitability and operating performance, he said.
One focal area is the Asia-Pacific region, where the investment operations outsourcing unit plans to enter a partnership and be able to offer its services by the end of the year, Houlihan said.
Northern Trust's focus is firms ranging from start-ups to those with $75 billion of assets under management, Houlihan said. So much the better if they have manage multiple asset classes and have or plan to have international operations, since those are areas of strength for Northern Trust, he said.
He said one of the company's selling points is that it has grown organically rather than through acquisitions, which means that, unlike some of its larger competitors, it can offer a single global platform and is not distracted by having to integrate a variety of platforms.