“Demographics” also serves as a catch-all excuse for many macro views. Some say interest rates  will revert to pre-Covid levels in the developed world due to weak demand (“It’s demographics!”),  while others worry about runaway inflation due to faster wage growth stemming from workforce  shortages (“It’s demographics!”). 

People production paramount 

Suppose you, dear reader, live long enough (say, the next 63 years). In that case, you may  experience something unseen in human history for at least the last 60,000 years: the peak and  prolonged decline in the size of the human population. 

That’s right, not since humans migrated out of Africa millennia ago has the number of humans  roaming the earth gone in reverse for any extended period. But by 2086, the human population  could peak at around 10.4 billion and begin to decline.

Why the decline? It won’t be because of climate change or a pandemic. Of all the supply chain  problems consumers have faced, one product’s production process is difficult to change: human  beings. 

Despite scientific advances, producing human offspring still requires a 40-week gestation  period—and then nearly two decades of care and comfort to create a fully functioning adult of use  to society (or longer for some). 

As such, for every two people choosing to produce offspring, only so many new children can  appear in the decades ahead. To “replace” the current population, the fertility rate—the average  number of children born to every woman—would need to be at least 2.1 (to account for more boys  being born than girls). Once we know how many people we have now and how many new ones  we can produce each year, we can guess how many people will exist in, say, 20 years.

Children are our future 

South Korea serves as the perfect example of declining birth rates. The South Korean fertility rate  has dropped 86 per cent since 1960, from almost six births per woman to 0.81 in 2021! According to the  United Nations’ World Population Prospects report, South Korea’s population could fall by around  20 million in the next 50 years. That is despite the United Nations’ slightly higher fertility rate  projections! 

China, often the poster child for discussions of demographic doom, faces a similar predicament.  China’s fertility rate is already down to 1.16 births per woman, so China’s population could decline  by around 654 million in the decades ahead from the current tally of 1.4 billion. 

Interestingly, India may fare best (at least if the goal is to have more people!). Based on current  figures, the long-term population of India could reach 1.7 billion, around 600 million more than  China’s at that point. Imagine the geopolitical consequences. 

However, India may fall well short of 1.7 billion people. India’s fertility rate is already at 2.0. And  India’s overall fertility rate is 1.6 in urban areas, well below the replacement rate.

Africa is the exception, but as per capita incomes rise, fertility rates usually fall, as seen  elsewhere. Also, Africa will likely need more time to grow to offset shrinking populations  elsewhere.

Overall, the total world fertility rate was 2.27 in 2021, according to the World Bank. When will the world rate dip below the 2.1 threshold? Possibly as soon as the next two decades. 

Nothing’s inevitable 

Fertility rates could pick up, whether through government incentives, cultural shifts, or  technological advances—nothing is inevitable. 

Moreover, many of our readers may rejoice over the population news (and some may even argue  it could not happen soon enough!). Fewer people equals less demand for natural resources.  Better for the environment, the story goes. 

Unfortunately, this story, though popular, is wildly short-sighted. 

First, global economies have already become less resource-intensive over the last few decades,  even as the population reached new global heights.

Second, at first blush, fewer people mean slower economic growth if productivity growth rates remain similar to historical norms. After all, economic growth is simply the number of people  working and the output they produce over time—productivity. In the US, for example, labour  productivity averaged ~2 per cent in the 50 years pre-Covid. With a 1 per cent workforce population growth,  overall economic growth trended at ~3 per cent annually. However, even with average productivity  growth, overall GDP will struggle to expand if population growth goes negative. 

A critical problem with a lack of economic growth is ballooning government debt. The only way to  overcome a debt problem is to be ever more productive to offset population decline. Otherwise,  the demographic burden will become a hefty fiscal burden, especially if public health and pension  costs also grow as aging occurs. 

Could productivity growth pick up to offset demographic decline? Advances in machine learning  provide some hope that technological advances could push  productivity upward, but the math is difficult to overcome. That said, there is hope: since the 1950s, only about 15 per cent (or 0.3 percentage points) of US economic growth is due to population growth. Rising educational attainment, more research & development, and a rising share of the  population working contributed more to growth. 

People generate problems but also solutions 

For us, the biggest problem of population decline is that fewer people will generate fewer ideas.  Some research indicates that ideas are becoming more difficult to find, and most growth comes  from new firms forming (based on new ideas). Fortunately, at least in the US, new firm formation  appears to be trending up.⁷ But we wonder whether this will persist with aging populations and shrinking labour forces?

College enrolment may suffer in the coming decades. Fewer children mean fewer  students, fewer graduates mean fewer professors, and fewer professors probably mean fewer colleges. As for the institutions themselves, the stronger names and brands will survive, but fewer students will be left for the lower-tier institutions. We already see evidence of this in South Korea, where total student enrolment has declined for 18 straight years.

It’s the demographics, stupid! 

Even a subject as seemingly simple as demographics, with some hard-to-argue-with math at its  core, leaves ample room for uncertainty about the future, especially as we stretch into the next  few decades, not just the next few years.

Nothing is predestined, but we hope this quick tour of the demographic landscape elucidates the  problems and possibilities we may face. 

This material has been authorised by Payden & Rygel Global Limited, a company authorized and regulated by the Financial Conduct. Authority of the United Kingdom, and by Payden Global SIM S.p.A., an investment firm authorized and regulated by Italy’s CONSOB.

AI-related technology has become an area of interest among investors, attracting significant foreign inflows in tech-heavy markets, such as Taiwan and Korea.

Meanwhile, the Greater China market continues to face some challenges, given the soft economic data in April and May. While we view that the country’s economic recovery remains intact longer-term, it requires some policy support to regain momentum.

China/Greater China Equities

The market now expects the Fed to pause its rate hikes in the June FOMC meeting due to the rising unemployment rate and moderating average hourly earnings in the US. Investor sentiment toward the US equities market was also boosted by Nvidia’s “overwhelming” guidance, increasing investor confidence in the demand and outlook of AI-related technology. As a result, the market is speculating that the economic slowdown or recession in the US may be pushed to the following year.

The Hong Kong/China market has remained range-bound with very weak sentiment. Investors worry about a double dip in the economy, given the soft economic data in April and May. The weakness in the property market is dragging consumption post-Covid recovery. We believe there will be some policy support, both fiscal and monetary, but it may not come until the second half of the year. We view that China’s economic recovery remains intact but requires some support to regain momentum.

China A-Shares

The market has become very bipolar as investors only favor sectors and companies with high earnings visibility, such as AI-related technology sectors and SOEs with improving ROEs. The rest are being de-rated, given the uncertainty in China’s economic recovery. In addition, geopolitical factors also weigh on market sentiment.

Asia Ex-Japan Equities

Similar to the US, investors have been focusing on AI-related technology as the area provides the highest earnings visibility. Hence, tech-heavy markets, such as Taiwan and Korea, recently witnessed significant foreign inflows. Meanwhile, the macro outlook and earnings momentum in other parts of the region, such as India and the Philippines, have been improving.

On the other hand, the potentially large amount of Treasury issuance due to the lifted US debt ceiling led US Treasury yields to rise, putting some pressure on the market in general.

Emerging Market Ex-Asia Equities

Stronger currencies in the region and the narrowing EM credit spread supported EM equities.

Japanese Equities

Japan is the best-performing country QTD, with continued inflows from foreign investors as they expect ROE improvement, given the rise in share buybacks and Warren Buffett’s bullish pledge toward Japan. Q1 GDP also outweighed expectations, with tourism’s contribution exceeding pre-Covid levels.

However, valuations are also running ahead of fundamentals, with NIKKEI’s 225 forward P/E approaching 20x.1 We are cautious of the recent frenzy toward Japanese equities, as ROE improvement is still yet to be seen, and rising wage pressures are mounting.

Asia Investment Grade Bonds

Recent new issuance in Asia investment grade bonds is very active, and the demand is strong.  Credit spreads keep tightening, while the rising Treasury yields add to duration risks, given that the potentially large amount of Treasury issuance after the US debt ceiling lift will keep yields high.

Asia High Yield Bonds

There is some demand returning to Asia ex-China high yield bonds after some correction as yields look attractive. After the Adani debacle in India fizzled out, the demand for Indian high yield bonds has become strong, given the improving earnings momentum.

Emerging Market Debt

Stronger currencies in the region and better momentum supported the EM credit spread to continue to narrow.

However, the rising Treasury yields add to duration risks, given that the potentially large amount of Treasury issuance after the debt ceiling lift will keep yields high.

Gold

Gold should continue to benefit as the US rate hike peaking. Gold remains a good hedge against heightened geopolitical risks.

It was with sadness that I see that UK fish and chip shops are now using shark meat in their offering.  The Fish and Chip Industry is a microcosm of many of the UK issues: raw product inflation feeding into the cost of living crisis (the price of white fish per kg is up 25 per cent since 2020 according to ONS), geo political issues with tariffs on Russian fish imports, and interestingly we export the bulk of our fish but import more.

For many years now I have thought of the short seller, like a shark, as an endangered species. How concerning is this? My thinking was originally in the face of the tidal waves of quantitative easing or QE, close to 0 per cent interest rates and the resulting hedge fund closures including York and Lansdowne.  Outperforming tracker funds in the face of this stimulus is very difficult with buy the dip as the risk management of choice.  I argued and still argue that active management, which includes long only and hedge funds, is a key part of a stable and healthy financial ecosystem. This is about balance and there is a favourable link with the overhunted and our much misunderstood sharks in the great oceans which are severely degraded and restoring these supreme creatures is key to improving the resilience of our waters.  Same for the active managers. Over the years members of the shark family have staged a small comeback and that is why some of them are destined to be battered and served with chips and vinegar. Importantly, the voice of hedge and active funds has got louder and is better suited for these challenging times, despite the negativity from a selection of our financial influencers.

We are in volatile markets which are open to further shocks, and for the time being, are without the momentum charging QE and interest rate cuts.  With this backdrop I want to use long only and hedge fund managers who have experienced more than one cycle and are not just goldilocks era investors to run part of my money.  This would include people like Charlie Munger, Warren Buffet and others based in the large asset management houses or in their own shops. It is their experience that I am looking for, and my thinking is that they are better prepared for these difficult times.  The core ingredient is their life experience which includes a variety of wins, defeats and pyrrhic victories – they are my ‘Chat GPT busters’, they are my managers whose experience has the potential to outwit AI. They have the ability to cut through the noise and harness their wisdom.  A bit like sharks, the much maligned and magnificent creatures of the ocean that have seen many of the world’s seismic changes but continue to go about their business assisted by their Ampullae of Lorenzini or electroreceptors.

This is not to say there is no place for ETFs or driverless funds in a portfolio – it should be smaller.  This could include the more rudimentary part of the strategy, for example a pure industry, one way country investment or hedge.

I am a believer in proactivity and active management.  The goldilocks era with the sense dulling free money has created lethargy and this is a potentially dangerous habit for investors in more volatile markets.  If I underperform it is because I took an active and directional call – it is not because I free wheeled into trouble and the resulting poor returns.  It is worth noting that the largest investor in the recently scuppered Signature Bank and First Republic Bank was an ETF.  These investments may be hidden within the soup of other financials, but they still lost almost all of their value.

Have faith, the Greatest and Silent Generation, the Boomers and Generation X – your experience and judgement well used is of great value as we move more into an increasingly AI preoccupied world.

“In India we have a saying, ‘There’s always room for one more.’” This insight from our Mumbai tour guide perfectly describes what we saw during our two-week research trip through Mumbai, Bangalore, Delhi, and Amritsar.

From watching five people pack into an auto-rickshaw built for two, to weaving through the unimaginable density of vehicles, motorbikes, rickshaws, CNGs, and pedestrians on the roads and markets… From witnessing the religious and cultural diversity in the mosques and temples that dot the same streets… It’s clear that it’s not accurate to describe India as merely a “country.” India is – more aptly put – a union of states, as someone in a meeting in Delhi said. How else can you describe a land uniting 17 per cent of the world’s population (1.4 billion people), more than 2,000 ethnic groups, six major religions and 121 spoken languages (22 of them official)? 

I saw this for myself at a dinner with a group of young Indian dancers in Mumbai. In a group of 15, each person was from a different state in India (there are 29 total), spoke anywhere from three to five languages, and communicated amongst themselves in English. Three-quarters were “veg” and only a quarter “non-veg” according to their cultural beliefs and in total represented three different religions.

Our guide’s saying, evoking inclusion and community, was perhaps most visible at the Golden Temple in Amritsar, the holiest shrine in Sikhism. The temple is home to the world’s largest langar (community kitchen) where anyone of any background can find a free meal or a place to sleep. Completely run by donations and volunteers who cook 24/7, the langar feeds 100,000 people every day, and tens of thousands more during religious festivals.

At a business and policy level, we saw this concept reflected in government digitisation initiatives like the Unified Payments Interface (UPI). When meeting with Paytm in Mumbai, one of India’s preeminent fintech companies that helped build the tech behind UPI and now offers innovative subscription-based payment solutions for vendors, we gained insight into the real-time digital payment system. Launched in 2016, UPI now accounts for 68 per cent of all payment transactions by volume. The UPI QR code is ubiquitous in India; operated by companies like Paytm, Phone Pe and Google Pay, it can be found in kirana stores (mom-and-pop shops), individual ice cream sellers parked in tourist areas, and even in chai stalls and fruit stands in the Dharavi slum, made famous by 2008 film Slumdog Millionaire. When buying tickets for a monument like the Taj Mahal or Humayun’s Tomb, you get a significant discount when paying with UPI or card, while cash-paying customers pay full price. (This is in line with Modi’s 2016 demonetisation campaign, which kickstarted India’s revolution in digital payments).

In an economy that is 50 per cent driven by consumption alone and where 90 per cent of that commerce happens at kirana stores, simplifying transactions and reducing payment transfer delays through UPI has a massive rippling effect. Improving cash flow for sellers and buyers alike encourages the establishment of new businesses and drives consumption. In 2021 alone, UPI unlocked USD12.6 billion in cost savings and USD14.6 billion of economic output in India. Beyond India’s megacities, UPI has started to find its footing in cash-dominant semi-rural and rural stores; in 2022, UPI transactions saw a 650 per cent increase in those regions. While urban areas rapidly digitise, India’s efforts to promote digital financial inclusion ensure the rural consumer doesn’t get left behind. 

After effectively digitising payments, India is now turning its attention to revolutionising e-commerce. In our meeting with Invest India in Delhi, the national investment promotion and facilitation agency, we got a glimpse into the Open Network for Digital Commerce (ONDC). This government initiative will make “digital commerce in goods and services available equitably to all Indian citizens,” according to ONDC’s Strategy Paper. Currently in testing and set to launch in mid-2023, ONDC will support a decentralized ecommerce network that all players – from Flipkart, Amazon, Uber and Zomato, to supermarkets, retailers and the 13 million kirana stores operating in India – can plug into. With all players in food, fashion, payment and travel accessible in one super-app, ONDC will enable any buyer to connect with any seller on the open network. The super-app will increase visibility of all merchants, including small and medium sellers that are often digitally excluded, expand choice and improve pricing for consumers, and drive healthy competition and a level playing field in an industry dominated by giants in other markets (think Amazon, Alibaba).

Having spent many years living and working in other emerging markets like Kazakhstan, Uzbekistan and Russia and following their efforts to improve market efficiencies and digitise, I find India’s journey incredibly compelling. India is conquering its unique conditions – which could easily impede another country’s journey – head on. Its mind-boggling density, ever-growing population, staggering ethnic and linguistic diversity, low smartphone/internet penetration, and limited infrastructure are the same conditions that are enabling India to leapfrog traditional consumption/development stages and go straight to digital, creating more efficient public and private services than we in the US could ever imagine.

India’s digital transformation has been commended by many, including the IMF in a recent working paper, as a world-class example for other countries to look to. Unlike many emerging markets where the private sector steps in to fill public service gaps, India’s government is a key innovator in the market and even a catalytic actor in the country’s digitisation journey. (When is the last time you heard a government described as a catalyst?). The goal behind Digital India is not merely to digitise specific public services, but rather build digital building blocks that can be used by both government and private players to “enable society-wide transformation” (IMF). India’s focus on building a digital environment that empowers, unites and supports innovation across the entire ecosystem is – to my mind – what sets it apart from the rest. 

In India, “there’s always room for one more,” and everything the country’s doing will ensure that this fast-rising tide indeed lifts all boats.

Working with the Economist Intelligence Unit, Northern Trust asked 200+ alternatives managers and institutional investors for their views. Highlights from the new survey are outlined in a new infographic.

• 6 out of 10 respondents cite transparency as the most important factor in alternative investing
• Regulation and risk management drive the need for transparency
• Despite its importance, there remains little consensus around best practices to ensure transparency.

Gain more insight into the importance of transparency and download the infographic today.

About Northern Trust

Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, asset servicing, asset management and banking to corporations, institutions, affluent families and individuals. Founded in Chicago in 1889, Northern Trust has offices in the United States in 19 states and Washington, D.C., and 22 international locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of March 31, 2017, Northern Trust had assets under custody of US$7.1 trillion, and assets under management of US$1 trillion. For more than 125 years, Northern Trust has earned distinction as an industry leader for exceptional service, financial expertise, integrity and innovation. Visit northerntrust.com or follow us on Twitter @NorthernTrust.
 
Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A., incorporated with limited liability in the U.S. Global legal and regulatory information can be found at https://www.northerntrust.com/disclosures.

There are several factors bringing this subject into sharp focus, from continued low/negative interest rates around the globe, to new regulations such as the central clearing of derivatives and the Basel Committee on Banking Supervision’s Basel III accord. Also, the domestic US market saw a huge shift in money market fund (MMF) investor sentiment leading up to the implementation of new MMF regulation. It remains to be seen whether this will also play out in Europe, now that the future of the EU MMF regulation has been defined and agreed.

In essence, the liquidity conundrum can be distilled as follows:

• If you are holding a higher proportion of cash in your portfolios, for example to margin on derivatives or to service illiquid investments, at best how can you generate an attractive rate of return or, at worst, can you actually find counterparties willing to hold the cash for you or are there investment options available which your current investment policy does not permit.
• Conversely, if you require cash to meet obligations, what are the potential sources of funding available to you, at what rates are they offered  and, will they be there in times of market stress?

Coping Mechanisms

In response to these challenges we have seen investors and managers employ various strategies and adopt different tools and techniques to help manage and source cash efficiently and effectively. These vary from good planning, in terms of forecasting and segmenting cash, to more sophisticated and structural approaches, such as investing on a liquidity-based budget as opposed to, or as well as, a risk-based budget. 

Taking a more holistic approach to the liquidity conundrum requires a wider and more fundamental prioritization of the four key tenets of any liquidity management strategy – Security, Liquidity, Operating Efficiency and Yield. More recently, we have seen a fifth key tenet emerge – Cost, being both the cost of sourcing cash and the cost, or drag on performance, of holding cash.

To start along this journey there are some practical steps investors can take to help address the liquidity conundrum:

• Understand investment portfolios from a liquidity perspective by maintaining a liquidity ladder and considering future calls on cash;
• Model and stress test your asset liquidity profile to be aware of the worst case scenario and potential sources of liquidity in normal and stressed markets;
• Determine optimal short and long cash positions, with associated supporting arrangements.

Do You Have a Plan?

To learn more about the liquidity conundrum and to review ways in which investors are beginning to address the challenge, read our full white paper on effective liquidity management. 
 

DISCLAIMER TEXT:
© 2017 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. This material is directed to professional clients only and is not intended for retail clients. For Asia-Pacific markets, it is directed to expert, institutional, professional and wholesale investors only and should not be relied upon by retail clients or investors. For legal and regulatory information about our offices and legal entities, visit www.northerntrust.com/disclosures. The following information is provided to comply with local disclosure requirements: The Northern Trust Company, London Branch; Northern Trust Global Services Limited; Northern Trust Global Investments Limited; Northern Trust Securities LLP. The following information is provided to comply with Article 9(a) of The Central Bank of the UAE’s Board of Directors Resolution No 57/3/1996 Regarding the Regulation for Representative Offices: Northern Trust Global Services Limited, Abu Dhabi Representative Office. The Northern Trust Company of Saudi Arabia – a Saudi closed joint stock company – Capital SAR 52 million. Licensed by the Capital Market Authority –License No. 12163-26 – C.R: 1010366439. Northern Trust Global Services Limited Luxembourg Branch, 6 rue Lou Hemmer, L-1748 Senningerberg, Grand-Duché de Luxembourg, Succursale d’une société de droit étranger RCS B129936. Northern Trust Luxembourg Management Company S.A., 6 rue Lou Hemmer, L-1748 Senningerberg, Grand-Duché de Luxembourg, Société anonyme RCS B99167. Northern Trust (Guernsey) Limited (2651)/Northern Trust Fiduciary Services (Guernsey) Limited (29806)/Northern Trust International Fund Administration Services (Guernsey) Limited (15532) Registered Office: Trafalgar Court Les Banques, St Peter Port, Guernsey GY1 3DA.

A recent survey of asset managers globally by Northern Trust and the Economist Intelligence Unit (EIU) found that, on the whole, the industry has capitalised on the explosion of available data, but some firms are benefiting significantly more than others.  In fact, only 13% of managers surveyed felt that their data strategy was entirely successful in helping meet business objectives.

Two factors seem to set apart managers who are capitalising on data vs. those who are drowning in it:

•  A documented and flexible data strategy tied directly to business goals
• The presence of effective and informed senior leadership to shape and implement that strategy

So how can managers create a data strategy that helps them meet their business needs? In our recently published white paper, Northern Trust draws on best practices and our experiences with clients to outline five essential questions you should answer when developing a data strategy:

• Who’s in charge?  Success requires senior leadership with the ability to work with the entire organisation.
• What do we want to achieve?  Data for data’s sake doesn’t work.  A strategy must be directly linked to specific, measurable business goals.
• Which data is the right data?  Not all data is equally valuable.  Identifying which data is most important for your objectives helps you prioritise effectively.
• What systems do we need? Business should lead systems development in consultation with IT.
• What cultural/organisational changes are needed?  A new data strategy will change how your organisation does business. Addressing the effect on people and processes is essential to successfully implementing your plan.

To learn more about how you can build a best practice data strategy, read the full white paper or contact Serge Boccassini, Senior Vice President for Institutional Product Solutions, at +1 312 557 2863.
 

DISCLAIMER TEXT:
© 2017 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. This material is directed to professional clients only and is not intended for retail clients. For Asia-Pacific markets, it is directed to expert, institutional, professional and wholesale investors only and should not be relied upon by retail clients or investors. For legal and regulatory information about our offices and legal entities, visit www.northerntrust.com/disclosures. The following information is provided to comply with local disclosure requirements: The Northern Trust Company, London Branch; Northern Trust Global Services Limited; Northern Trust Global Investments Limited; Northern Trust Securities LLP. The following information is provided to comply with Article 9(a) of The Central Bank of the UAE’s Board of Directors Resolution No 57/3/1996 Regarding the Regulation for Representative Offices: Northern Trust Global Services Limited, Abu Dhabi Representative Office. The Northern Trust Company of Saudi Arabia – a Saudi closed joint stock company – Capital SAR 52 million. Licensed by the Capital Market Authority –License No. 12163-26 – C.R: 1010366439. Northern Trust Global Services Limited Luxembourg Branch, 6 rue Lou Hemmer, L-1748 Senningerberg, Grand-Duché de Luxembourg, Succursale d’une société de droit étranger RCS B129936. Northern Trust Luxembourg Management Company S.A., 6 rue Lou Hemmer, L-1748 Senningerberg, Grand-Duché de Luxembourg, Société anonyme RCS B99167. Northern Trust (Guernsey) Limited (2651)/Northern Trust Fiduciary Services (Guernsey) Limited (29806)/Northern Trust International Fund Administration Services (Guernsey) Limited (15532) Registered Office: Trafalgar Court Les Banques, St Peter Port, Guernsey GY1 3DA.

I have worked with my team at Northern Trust on how we respond to changes in our business environment, and more importantly, how we help our clients respond. More than anything else, creating a focused technological operational strategy is critical. The right strategy merges pre-existing work and tools with things specifically designed to meet today’s digital landscape. We need to focus our approach rather than initiate a wholesale replacement of products and strategies.

I recently joined a panel at the NICSA Strategic Leadership Forum to discuss these issues. The conversation helped clarify what’s at stake. Here are three important trends in this area I discussed during the event.

Partnerships Are Key

Short-sighted institutions sometimes react to industry disrupters in a defensive way, seeing the future of the industry as a battle between an “old guard” and new companies. This is wrong. Asset managers should build and retain relationships with disruptors. 
We have consulted with robotics labs and robo-advisories. These relationships are mutually beneficial, allowing for smaller companies to use large datasets and the resources of a large organisation. Asset managers gain access to leading-edge thinking and observations that can help inform changes to how we do business. Start-up firms can bring a new energy to traditional asset management firms, which is appealing when trying to attract new clients.
Bigger institutions sometimes incubate startups and disruptors in house, while smaller companies may lean more into partnerships to reduce implementation costs. 

Embrace the Disruption

The sooner asset managers embrace the coming wave of digital disruption, the better. A tradition-bound mindset when it comes to technology is no longer adequate. Banks need to thoroughly understand the technology they use and how it is being built. 
At Northern Trust, this has meant creating a Fund Accounting “lab”, where we combine business and technology innovations. In the lab, we reimagine how we work with each other and with clients. We can now create solutions in real-time, seeing how new technologies can benefit clients. 

Changing Demographics of Investors

It is increasingly important to look to the next generation of investors – millennials who are very conscious of disruption. 
As millennials build wealth, we will see a mix of asset management tools and access to direct investments by millennials. The millennial generation expects asset managers and banks to provide tools such as robo-advising along with unparalleled speed and security, as promised by such innovations as blockchain technology and predictive analytics. 
Technological disruption isn’t going away. Smart asset managers will embrace change and implement processes that allow them to be agile in how they respond and adapt.

DISCLAIMER TEXT:
© 2017 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. This material is directed to professional clients only and is not intended for retail clients. For Asia-Pacific markets, it is directed to expert, institutional, professional and wholesale investors only and should not be relied upon by retail clients or investors. For legal and regulatory information about our offices and legal entities, visit www.northerntrust.com/disclosures. The following information is provided to comply with local disclosure requirements: The Northern Trust Company, London Branch; Northern Trust Global Services Limited; Northern Trust Global Investments Limited; Northern Trust Securities LLP. The following information is provided to comply with Article 9(a) of The Central Bank of the UAE’s Board of Directors Resolution No 57/3/1996 Regarding the Regulation for Representative Offices: Northern Trust Global Services Limited, Abu Dhabi Representative Office. The Northern Trust Company of Saudi Arabia – a Saudi closed joint stock company – Capital SAR 52 million. Licensed by the Capital Market Authority –License No. 12163-26 – C.R: 1010366439. Northern Trust Global Services Limited Luxembourg Branch, 6 rue Lou Hemmer, L-1748 Senningerberg, Grand-Duché de Luxembourg, Succursale d’une société de droit étranger RCS B129936. Northern Trust Luxembourg Management Company S.A., 6 rue Lou Hemmer, L-1748 Senningerberg, Grand-Duché de Luxembourg, Société anonyme RCS B99167. Northern Trust (Guernsey) Limited (2651)/Northern Trust Fiduciary Services (Guernsey) Limited (29806)/Northern Trust International Fund Administration Services (Guernsey) Limited (15532) Registered Office: Trafalgar Court Les Banques, St Peter Port, Guernsey GY1 3DA.

If you are contemplating a move into alternatives, finding an effective service provider is crucial. The right partner can offer the solutions, scale and market expertise you need to achieve success. Here are 10 questions every manager should ask when evaluating service providers:

1. DO YOU OFFER SERVICES TO ALTERNATIVE ASSET MANAGERS AND ASSET OWNERS? 

Appointing a service provider that services both asset managers and their investors can give you a 360° view of industry challenges and opportunities. Consider not only the service provider’s experience, but also the way it is organised: Is it structured so that the team that supports fund managers can benefit from the expertise and insight of the team that works directly with investors?

2. WHICH ALTERNATIVE ASSET CLASSES DO YOU SUPPORT? 

While there are growing opportunities for fund managers to launch products across different asset classes, not all service providers are proficient in every asset class. If you are primarily focused on a single asset class such as private equity, it can be tempting to hire a boutique administrator. But choosing a service provider that supports the full spectrum of alternative asset classes may help you tap into developing trends and avoid the burden of changing service providers or hiring multiple firms.

3. HOW DO YOU SUPPORT FUND LAUNCHES/TRANSITIONS? 

When launching a fund, understanding how the launch will be supported is critical to getting to market quickly and meeting regulatory approvals along the way. If you’re transitioning a fund, it is essential to ensure the transition will not interfere with your daily trading activity. In both cases, ask potential service providers how their approach promotes appropriate governance, clear ownership, accountability and oversight.

4. CAN YOU HELP ME MANAGE MY DATA AND REPORTING OBLIGATIONS?

Today, managers are asked to capture and validate exponentially more data and deliver it to a broadening array of stakeholders: trading desks, governing boards, regulators, investors, counterparties and others. Carefully evaluate potential service providers’ ability to capture, aggregate, validate and report crucial data. Whilst technology plays an important role in bringing greater automation and transparency, consider also the team that will support you.

5. ARE YOU A “ONE STOP SHOP” OR A SPECIALIST SERVICE PROVIDER?

Thoughtfully lay out the full scope of services you may require. In addition to traditional administrative functions, contemplate potential middle office opportunities. Avoid pressure to sign up for services you don’t need. Focus on the “how” as well as the “what” of each service provider’s offerings. A larger tier-one service provider should be in a position to offer you the resources you need both today and as your business grows in the future.

6. WHAT IS YOUR GEOGRAPHIC REACH? 

Regional or domicile-specific specialists may be challenged if you decide to expand into new markets or establish cross-jurisdictional structures. Global providers, on the other hand, offer the flexibility to service funds in more than one jurisdiction. Understanding the geographic implications of current and future plans are an important part of identifying a service provider for the long term.

7. HOW CAN YOU HELP ME MEET INCREASED TAX TRANSPARENCY REQUIREMENTS? 

Ensure a service provider will support you to meet your obligations to tax authorities and is anticipating future changes such as the OECD’s Base Erosion and Profit Shifting tax (BEPS). Regulations such as the Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA) require a disciplined and well-informed approach. 

8. WHAT IS YOUR APPROACH TO RELATIONSHIP MANAGEMENT? 

The complexities of alternative asset funds make it imperative that you know and trust the people you’re working with. Evaluate a provider’s service model: Will you have access to the expertise you need? Is there a service level description with performance measures? What are response times? What are the escalation procedures? Is the team experienced in your strategy? An effective relationship means speaking to people who not only understand your day-to-day requirements but actively engage with you to support your long-term strategy.

9. WHAT IS YOUR APPROACH TO COMMUNICATING AND SUPPORTING REGULATORY CHANGES? 

Regulation is evolving faster than ever – across regions and sectors. It’s easier to keep ahead if a provider has a dedicated approach that gives both a global and local perspective. Their commitment should be backed by expertise and solutions to give you the services you need, when you need them.

10. HOW CAN YOU HELP ME KEEP UP WITH INDUSTRY TRENDS?

Finally, keeping an eye on industry trends will help you manage your programme more effectively. Consider industry memberships. Does the service provider sit on any industry task forces? How will information be shared with you? Regular seminars can provide you with new information and contacts.

To learn more about Northern Trust’s services for alternative fund managers, contact Douglas Gee at douglas_gee@ntrs.com.  

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