Northern Trust Study: Alternative Indexes the New Active Decision in Beta Management

Institutional investors, increasingly considering the full range of active and passive strategies available, may view the allocation to alternative indexes as the new active decision in beta management. This is according to new research from the asset management business of Northern Trust (Nasdaq: NTRS) which surveyed the views of 51 institutional investors across the globe, representing a collective US$800bn in assets under management.

The survey forms the basis of the white paper entitled, The New Active Decision in Beta Management, which profiles how early adopters of the allocation to alternative indexes are using the approach. It follows a similar study by Northern Trust last year which examined the blurring lines between passive and active management and the rise of customized beta strategies.

Increasing Interest in Alternative Indexes

Among the institutions Northern Trust surveyed, three in 10 have an existing allocation to alternative indexes and a further 32 percent are considering using them. Of those using alternative indexes, six in 10 have increased their allocation over the past two years.

“Rather than viewing their investment strategy options as either active or passive, investors today are considering a continuum of options within beta solutions, with traditional market cap-weighted indexes on one end and fully active strategies on the other,” said John Krieg, managing director of asset management, Europe, Middle East and Africa region for Northern Trust. “As institutional investors face an increasingly challenging environment, they seek increased control and flexibility in their passive mandates and this has largely contributed to the increased interest in alternative indexes.”

Goals for Investors – Diversification and Risk Management

“Alternative indices are appealing because they enable investors to access market returns by capturing exposure to specific factors such as value, momentum and volatility,” said Chad Rakvin, managing director of global index equity at Northern Trust. “But, deciding to invest in an alternative index, and against which index to invest, needs to be considered in a similar vein to an investor’s active investment allocation decision: 60 percent of institutional investors we surveyed felt their decision to allocate was like an active decision, requiring a similar level of due diligence.”

According to the study, value and low volatility attract the greatest investor focus, with half or more survey participants indicating that their alternative index allocation aims to capture value and low volatility premium. The survey also shows that the majority of investors with an allocation to alternative indices are looking to reduce their risk through these exposures (92.3 percent) with diversification coming close behind (84.6 percent). Seeking return was less important with just under 54 percent of investors listing that as a driving factor.

Overcoming Barriers - Making the Decision to Allocate

Almost half of respondents said that perceived complexity is one of the biggest obstacles in allocating to alternative indexes. As many of these alternative indexes are new, the next biggest hurdle among respondents is lack of a sufficient track record. However, a common theme among most respondents who do make the decision to allocate to alternative indexes is that the strategy helps them meet their expectations.

“Based on responses to the survey, allocations to alternative indexes seem poised to grow as understanding of these benchmarks improves, said Mamadou-Abou Sarr, senior product specialist for global index management at Northern Trust. “While the investment is passive, we believe the decision is active and encompasses four steps.”

Northern Trust defines the four steps as beginning with investors defining their objectives. This allows them in the second step to work with their managers to identify the factor or factors which will best meet these objectives. The third step involves determining the combination and weighting of these factors before finally, investors implement the allocation and define the monitoring criteria.

Active Decision, Passive Implementation

“Skill sets of both active and passive investment experts are needed for alternative indexes to be a success,” said Matt Peron, managing director, active equity, at Northern Trust. “Investors must assess the investability, liquidity and index rules as they do with their passive investments, but must also evaluate any fundamental criteria of an alternative index to ensure that the indexes are appropriate to meet their objectives, just as they would with an active investment.”

For half of the investors surveyed, the decision to allocate to alternative indexes sat within the active team. In less than 10 percent of firms surveyed, the index team made the decision to allocate to alternative indexes. Around 70 percent say the funding for the alternative index portion of their portfolio emanated mainly from assets currently invested in active strategies.

“More than 70 percent of the investors we surveyed use their allocation to alternative indexes strategically, as opposed to a short term tactical bet,” said Bo Kratz, managing director for asset management, Asia-Pacific, Northern Trust. “This is key as, in order to reap the benefits of alternative indexes, investors need to ensure their allocations are truly aligned to their objectives and treat their allocation in the same way they would an active decision.”

A copy of the white paper and accompanying short video interviews are available to download at

About Northern Trust

Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of investment management, asset and fund administration, banking solutions and fiduciary services for corporations, institutions and affluent individuals worldwide. Northern Trust, a financial holding company based in Chicago, has offices in 18 U.S. states and 16 international locations in North America, Europe, the Middle East and the Asia-Pacific region. As of March 31, 2013, Northern Trust had assets under custody of US$5 trillion, and assets under investment management of US$810.2 billion. For more than 120 years, Northern Trust has earned distinction as an industry leader in combining exceptional service and expertise with innovative products and technology. For more information, visit or follow us on Twitter @NorthernTrust.


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