Northern Trust Asset Management moves into European ETFs

Northern Trust may be one of the most established and trusted US financial services brands but the asset management arm of the US group is still establishing its track record in European exchange-traded funds.

Northern Trust entered the European market in March 2021 when it launched through its Flexshares business two funds – a Developed Markets Low Volatility Climate ESG UCITS ETF and a Developed Market High Dividend Climate ESG UCITS ETF.

These were followed in September 2021 by the Flexshares Emerging Markets Low Volatility Climate ESG UCITS ETF and the FlexShares Emerging Markets High Dividend Climate ESG UCITS ETF.

Later, in February last year, Northern

Trust Asset Management made available in Amsterdam and London its Listed Private Equity UCITS ETF.

Darek Wojnar, the head of Funds and Managed Accounts at Northern Trust Asset Management, said the fledgling European business crucially draws on the experience of the firm in the US, where the asset manager has been offering ETFs for more than a decade.

Wojnar told Global Investor: “We design products globally but focus on the specific requirements of local markets. That said, the common element of our Flexshares products in the US and EMEA is that they are outcome-oriented. We are seeking to solve some of the everlasting challenges that investors face globally.”

Capital appreciation, income generation, risk management and liquidity are some of the basic outcomes that investors can expect from Northern Trust Asset Management exchangetraded funds, Wojnar said.

US investors have in the past year used Northern Trust Asset Management ETFs to address higher inflation through natural resources ETFs or specialist tools such as Treasury Inflation Protected Securities.

“EMEA investors focusing on ESG want to know that their investments are exposing them to income generating dividend paying stocks or lower volatility stocks, for example, but it is also important for them to know that their investments are also lowering carbon emissions,” said Wojnar.

The European ETF market was resilient in 2022, as positive flows of €78.4bn (£68.8bn) helped offset the decline in equity and bond valuations which cut European ETF assets to €1.32tn last year from €1.41tn at the end of 2021, according to Morningstar.

Environmental, social and governance (ESG) ETFs accounted for €51bn or 65% of inflows in 2022, meaning these sustainable European ETFs now have assets under management worth almost €250bn.

ESG ETFs then are popular at the moment but Wojnar said Northern Trust Asset Management is looking to add to the European market rather than take assets from existing funds.

He said: “We do not want to compete with a product where investors already have five or ten to choose from, rather we are trying to be additive to the marketplace by offering a unique perspective through our research and engagement with clients.”

The Northern Trust Asset Management European exchangetraded funds reflect client feedback on the rapidly-changing European ESG regulatory framework.

Wojnar said: “Clients came to us and said they would like our help with bringing various frameworks together so we built a framework that incorporated Taskforce for Climate Related Financial Disclosures, materiality standards from SASB and additional measures on carbon emissions.”

Naturally, one challenge with a new product portfolio is attracting anchor clients when there is no performance to reference.

“Investors also look for track records which is our distinguishing factor. While we find that some investors come in early and others choose to wait, we try to be additive to the marketplace and serve investors over a long period of time.”

But Wojnar said lower fees are typically ineffectual when it comes to building critical mass in a new ETF.

“At the end of the day, it is an investment portfolio that has a factorbase and sustainability considerations, so clients need to be comfortable with products having consistent measures with their portfolios. At NTAM, we adopt a patient approach and invest in clients through education.”

With passive ETFs enjoying strong demand at the end of 2022, Wojnar feels that European investors are preparing for sustained period of economic uncertainty linked to the situation in Ukraine.

“Investors have re-evaluated their outlook for not only this year but the next decade to reflect the macroeconomic environment and the geopolitical instability with Ukraine and Russia. At the same time, inflation is no longer viewed as transitory, rather it is persisting in various parts of the world.”

He added: “All of these factors prompt firms to engage with managers like NTAM more deeply. That said, investible capital is always more scarce in times of asset depreciation, so we have to be more careful towards how we continue to make these investments going forward. The challenge for us is to sustain our investments, but to not overextend ourselves.”

Wojnar said the sustained interest rate hikes in the US, Europe and UK over the past year have presented an unfamiliar challenge to some debt ETF investors.

He said: “Rising global interest rates have caused investors to think about fixed income differently, which presents an interesting and attractive opportunity for Flexshares and ETFs more broadly.

“Most investors have not previously experienced dramatic increases in interest rates over a short period of time but, interestingly, we expect that fixed income will start paying interest rates and be additive to income generation for clients going forward. It may still take time before that transition settles but I think fixed income will be an attractive general area,” Wojnar added.

Wojnar draws here on his 20 plus years’ ETF experience as BlackRock’s former managing director and head of that firm’s US iShares product and the former head of US iShares product strategy and research at Barclays Global Investors. He joined Northern Trust in early 2018.

“If I look back over that time, I think most of the prognoses for ETF growth underestimated the opportunity. We have around $8.5 trillion in AUM globally but if you look at CAGR over the past five years, it was ranging between 18-23% so growth has been consistently high and current projections continue to be positive with percentages ranging from 15 to 20%.”

Stepping back, Wojnar said the outlook for European ETFs is bright. “There are opportunities for large numbers of investors to start using these tools in a way that is additive to their portfolios. In my opinion, the opportunity will remain high for years to come, particularly in those areas that have been covered less.”