Products December 6, 2018

Investment Product and Service Launches

Northern Trust purchases FX software provider; Nuveen incorporates ESG funds to fixed-income lineup and Nuveen launches quantitative strategies affiliate.

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Northern Trust purchases FX software provider

Northern Trust has agreed to acquire BEx LLC, a provider of foreign exchange (FX) software solutions, to drive growth in its Global Foreign Exchange business. 

The acquisition will give Northern Trust ownership of a platform providing algorithmic FX trading, global liquidity aggregation and transparency in execution and pricing to institutional clients worldwide. The agreement builds on an exclusive partnership between Northern Trust and BEx announced in 2016.

“BEx has been a key differentiator for Northern Trust, increasing the depth and breadth of our global FX execution capabilities,” says Pete Cherecwich, president of Corporate & Institutional Services (C&IS) at Northern Trust. “In an evolving FX marketplace, this acquisition provides a foundation for sustained growth and innovation on behalf of our clients.”

Headquartered in Chicago and established in 2013, BEx is a financial technology software firm dedicated to developing automated FX trading solutions. 

In recent years Northern Trust has launched solutions integrating BEx technology with Northern Trust’s global platform and experience in FX, including CompleteFX, a stand-alone execution service for investment managers seeking best-in-class operational efficiency and reduction of risk; and the FX Algo Suite, sophisticated client execution algorithms that allow clients to manage their FX exposure with an enhanced level of control and transparency.

“We’ve built a compelling global offering that allows clients to benefit from highly automated trade execution with enhanced transparency,” says John Turney, head of Global Foreign Exchange at Northern Trust. “Ownership of BEx will strengthen our proven ability to bring innovative products to market rapidly, further enhancing the speed, reliability and quality of our FX services.”

Northern Trust has also partnered with Lumint Corporation, a provider of currency management services, to deliver advanced portfolio, share class and look-through hedging services, complemented by sophisticated transparency and analytical tools. 

“This acquisition reinforces Northern Trust’s commitment to providing innovative trading, execution and outsourcing services across all asset classes and regions,” says Michael Vardas, global head of Northern Trust Capital Markets. “Taking full ownership of the BEx platform will future-proof our growth strategy and support our most sophisticated clients as they navigate global markets.”



Nuveen incorporates ESG funds to fixed-income lineup

Nuveen has added two actively-managed fixed income mutual funds to its responsible investing suite of funds, the TIAA-CREF Green Bond Fund (TGROX) and TIAA-CREF Short Duration Impact Bond Fund (TSDBX). The funds seek to deliver competitive financial returns and positive environmental, social and governance (ESG) outcomes.

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“Responsible investing should be at the core of prudent portfolio construction. It continues to appeal to today’s diverse generation of investors who are seeking specific social and environmental outcomes, alongside the financial performance objectives established for their portfolios,” says Amy O’Brien, managing director and global head of responsible investing at Nuveen. “We are committed to offering investors competitive investment solutions that leverage the combined knowledge and talents of our investment professionals and our legacy of responsible investing innovation.”

The TIAA-CREF Green Bond Fund invests in a diversified investment-grade portfolio that leverages Nuveen’s expertise in labeled and unlabeled green fixed income securities designed to deliver competitive long-term risk-adjusted investment returns against its benchmark, the Bloomberg Barclays MSCI U.S. Green Bond Index. Investments primarily include securities issued by sovereign and local governments, corporations, securitized bonds and multinational agencies, with an emphasis on renewable energy, climate change and natural resources. This fixed-income subset may be attractive to investors who wish to make a positive impact on the environment and climate without compromising risk or returns.

The TIAA-CREF Short Duration Impact Bond Fund seeks current income by investing primarily in a diversified portfolio of fixed income securities with an average maturity of three and a half years. The fund makes strategic allocations to bonds that demonstrate environmental and societal impact within affordable housing, community or economic development, and renewable energy, climate change and natural resources. The limited amount of time until maturity helps manage risks associated with rising interest rates and is designed to appeal to investors with a shorter time horizon or for retirees in a draw down phase. The fund’s benchmark is the Bloomberg Barclays U.S. 1-3 Year Government/Credit Bond Index.

The funds will be co-managed by Stephen Liberatore, CFA, and Jessica Zarzycki, CFA.

Both funds focus on undervalued, investment-grade securities and seek to add value through sector allocation, security selection and duration, and yield curve positioning. This investment approach gives special consideration to certain ESG criteria, with an emphasis on identifying publicly traded fixed income securities with a direct and measurable societal or environmental impact.


Nuveen launches quantitative strategies affiliate

Nuveen has launched Nuveen Quantitative Strategies, a new investment affiliate providing systematic investments and insights across equity and fixed-income asset classes.

The firm’s existing quantitative- and index-investing team, based in San Francisco and New York, will serve as a foundation for this effort as Nuveen continues to build out its investment platform to harness and develop new technologies. To augment these capabilities, Nuveen will also seek external partnerships with academics and industry experts. 

“We created this new affiliate to better leverage artificial intelligence and other technologies as big data plays an increasingly important role as a positive disrupter in the asset-management industry,” says Nuveen Chief Executive Officer Vijay Advani. “We continue to invest in our people and technology so that we can offer clients solutions that provide competitive returns as well as efficient market exposure. We’ll also work closely with our parent firm, TIAA, whose heritage of providing retirement solutions to academic institutions can help us forge partnerships with universities to conduct research and further advance our capabilities.” 

Client Service December 6, 2018

When Auto-Roth Accounts Make More Sense

Janus Henderson research suggests the vast majority of auto-enrollment programs fund only pre-tax accounts; this is despite the fact that for younger, lower-income employees, funding a Roth account may be a more appropriate long-term option.

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Automatic retirement plan features have put significant numbers of employees in the U.S. on a path towards retirement readiness, but employers could still do a lot more to overcome participant inertia.

This is according to a new white paper published by Janus Henderson, “Defined Contribution Redefined.” According to Janus Henderson researchers, since the enactment of the Pension Protection Act of 2006 (PPA), automatic features have become common within defined contribution (DC) plans such as 401(k)s, 403(b)s and 457s. In particular, the main trio of automatic features—auto-enrollment, auto-escalation and automatically diversified qualified default investment alternatives (QDIAs)—have helped increase DC assets from $3.0 trillion in 2007 to $5.3 trillion in 2017.

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“Now that these automatic and default features have gained widespread acceptance, it may be time to consider additional steps to further enhance participant retirement preparedness,” the white paper says.

Most plans with auto-enrollment offer it to new hires (94.5%), while approximately one-quarter (25.4%) have auto-enrolled existing employees either as a one-time sweep or periodic sweep. According to the white paper, anecdotal evidence suggests the vast majority of auto-enrollment programs fund only pre-tax accounts. This is despite the fact that for younger, lower-income employees, funding a Roth account may be a more appropriate long-term option.

“While contributions are made with after-tax dollars, the earnings can potentially accumulate tax free for many years. Further, younger, lower-paid employees are likely in a lower tax bracket, so the tax advantages of pre-tax deferrals are muted,” the white paper says.

Janus Henderson researchers consider a theoretical 25-year-old in a 20% effective federal tax bracket.

“Contributions of $2,500 a year for 10 years will grow to $32,951, assuming a 6% annual rate of return. If no additional contributions are made, the balance will grow to $189,253 by the time the investor reaches age 65,” the white paper says. ‘Distributions from a Roth will be tax free, while distributions from a tax-deferred account will result in an after-tax distribution of $151,403. In this case, the Roth provides a more valuable retirement benefit, even after accounting for the annual $5,000 tax savings over 10 years ($2,500 x 20% = $500/year).”

According to Janus Henderson researchers, another innovative strategy that employers should consider is linking automatic escalation to retirement income replacement projections. Citing a previous Callan survey, the white paper says approximately 70% of all nongovernmental plans offer auto-escalation, up from 48% in 2014. Further, the number of plans that use an opt-out approach also grew from 52.8% in 2014 to 70.8% in 2017.

“The vast majority of plans automatically increase deferrals by 1% per year (86%), with a median cap of 15% of compensation,” the white paper says. “About half of companies selected their cap because it was likely to be most palatable to participants or limit opt-outs, while one-third felt it would maximize the likelihood participants reach their retirement goals.”

While automatically increasing deferrals annually should help participants accumulate larger balances at retirement, a uniform 1% approach may not help some participants adequately replace their pre-retirement income, Janus Henderson researchers warn.

“For example, older employees have fewer years to accumulate savings. If these employees do not have substantial account balances, they may require both a higher starting deferral rate and more aggressive annual increases to meet their retirement goals,” the white paper says. “Even younger employees may fall short unless prompted by their employer to increase deferrals at a faster rate.”

When it comes to automatic investments, while most plans use target-date funds as their default, 75.2% offer a managed account option. In these cases, the vast majority (92.6%) offer it as an opt-in feature whereby participants must proactively elect to use the feature similar to any other investment decision.

“According to Callan, only 13.3% of sponsors pay for the managed account fee, with the majority assessing the costs directly to the participant or shared by the sponsor and participant,” the white paper says. “Given the sensitivity to the additional cost of a managed account, it is understandable why many sponsors have elected to use a target-date fund as their plan’s default option.”

As the white paper points out, Morningstar and others posit that in some cases, the higher fee associated with managed accounts may be justified, particularly for older participants with significant balances.

“A hybrid or dynamic solution is suggested whereby younger participants are defaulted into the plan’s target-date fund but later defaults participants into the managed account solution upon reaching a specified age,” the white paper says. “Choosing an appropriate age would depend upon each plan’s unique participant characteristics.”

The paper notes that few DC providers currently offer the ability to facilitate a dynamic QDIA approach; however, the marketplace will likely evolve to meet future plan sponsor demand, according to Janus Henderson researchers.

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