Profitable mutual fund business for Northern Trust

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Aug 8, 2019

Northern Trust Corporation reported the second-quarter net income per
diluted common share of $1.75, compared to $1.68 in the second quarter of 2018 and $1.48 in the first
quarter of 2019. Net income was $389.4 million, compared to $390.4 million in the prior-year quarter and
$347.1 million in the prior quarter.
“Northern Trust performed well in the second quarter of 2019 despite the impact of a mixed global
macroeconomic environment,” said Michael O’Grady, Chairman, and Chief Executive Officer. “Net income
was flat versus the prior-year quarter and improved 12% on a sequential-quarter basis, as revenue grew
2% and expense declined by 2%. We continued to have success in generating organic growth across our
businesses, while also driving improved efficiencies. We generated a return on common equity of 15.9%
during the quarter and returned $402 million to common shareholders through dividends and the repurchase
of 2.9 million shares.”
O’Grady added, “During the quarter we announced our 2019 Capital Plan actions, which include
increasing our quarterly dividend by 17% to $0.70 per share and the flexibility to repurchase up to $1.4 billion
of common stock. We believe the capital distributions included in our plan demonstrate the strength of
Northern Trust’s focused business model and balance sheet, as well as our commitment to shareholders.”

Lisa Shea points out in her latest article that US mutual funds reported sizable growth in the first quarter, demonstrating ongoing investor demand despite rising cost pressure.

She continues in the argument that while some may have dragged mutual funds out to the cart to be hauled away, they remain a sizeable and still growing presence in our industry. Exchange-Traded Funds (ETFs) are also growing, but it’s important to look at the full picture. As of March 31, 2019, the Investment Company Institute (ICI) reports that there are more than $19 trillion in assets in open-end mutual funds, compared to $3.77 trillion in ETFs, with AUM growing for both categories.

Furthermore, the ICI’s 2019 Investment Company Fact Book notes that there were more than 17,000 open-end mutual funds active as of the end of 2018 and, although mergers and liquidations have outpaced launches for the past few years, new open-end funds continue to launch, with 345 new funds in 2018. While ETF growth is real, with 237 new ETFs launching in 2018, they have not yet come anywhere close to knocking the open-end mutual fund on the head.

Continued cost pressure from the street is translating to an inflow of investments into lower-cost products. ICI reports that 40% of mutual fund owning households consider fees and expenses to be “very important” to their fund selection. Overall, fund expense ratios are down. Mutual funds are still very much in the mix, however, provided that a fund complex offers a share class or fee structure that hits the right price point for the target market. Retail and retirement investors are still buying mutual funds, and ICI reports that 80% of the 56 million households who are mutual funds owners are buying funds through their employer-sponsored retirement plans. There continues to be investor demand for registered mutual funds.

Defining your target market remains critical to determining your product strategy. Understanding the full picture of market trends can help you to make informed decisions about your way forward. Although ETFs are getting much of the attention, open-end funds are still alive and kicking.

As a conclusion she states that as you consider which vehicle is the right one for you, keep these questions in mind:

Define your target market. Have you identified the fund vehicles best suited to each market?
Be aware of what is happening in the broader marketplace, rather than reactively launching a product because “everyone else is doing it.” Make conscious choices that will support your long term distribution objectives.
You have options. US mutual funds allow for broad distribution to both retail and institutional investors.
Have you obtained legal advice or guidance to help you arrive at the best solution?