The fund seeks a combination of growth and income. Northern’s Investment Policy Committee develops tactical asset allocation recommendations based on economic factors such as GDP and inflation; fixed-income market factors such as sovereign yields, credit spreads and currency trends; and stock market factors such as domestic and foreign earnings growth and valuations. The managers execute that allocation by investing in other Northern funds and outside ETFs. As of 6/30/2011, the fund holds 10 Northern funds and 3 ETFs.
Northern Trust Investments. Northern’s parent was founded in 1889 and provides investment management, asset and fund administration, fiduciary and banking solutions for corporations, institutions and affluent individuals worldwide. As of June 30, 2011, Northern Trust Corporation had $97 billion in banking assets, $4.4 trillion in assets under custody and $680 billion in assets under management. The Northern funds account for about $37 billion in assets. When these folks say, “affluent individuals,” they really mean it. Access to Northern Institutional Funds is limited to retirement plans with at least $30 million in assets, corporations and similar institutions, and “personal financial services clients having at least $500 million in total assets at Northern Trust.” Yikes. There are 51 Northern funds, seven sub-advised by multiple institutional managers.
Peter Flood and Daniel Phillips. Mr. Flood has been managing the fund since April, 2008. He is the head of Northern’s Fixed Income Risk Management and Fixed Income Strategy teams and has been with Northern since 1979. Mr. Phillips joined Northern in 2005 and became co-manager in April, 2011. He’s one of Northern’s lead asset-allocation specialists.
Management’s Stake in the Fund
None, zero, zip. The research is pretty clear, that substantial manager ownership of a fund is associated with more prudent risk taking and modestly higher returns. I checked 15 Northern managers listed in the 2010 Statement of Additional Information. Not a single manager had a single dollar invested. For both practical and symbolic reasons, that strikes me as regrettable.
Northern Institutional Balanced, this fund’s initial incarnation, launched on July 1, 1993. On April 1, 2008, this became an institutional fund of funds with a new name, manager and mission and offered four share classes. On August 1, 2011, all four share classes were combined into a single no-load retail fund but is otherwise identical to its institutional predecessor.
$2500, reduced to $500 for IRAs and $250 for accounts with an automatic investing plan.
0.68%, after waivers, on assets of $18 million. While there’s no guarantee that the waiver will be renewed next year, Peter Jacob, a vice president for Northern Trust Global Investments, says that the board has never failed to renew a requested waiver. Since the new fund inherited the original fund’s shareholders, Northern and the board concluded that they could not in good conscience impose a fee increase on those folks. That decision that benefits all investors in the fund. Update – 0.68%, after waivers, on assets of nearly $28 million (as of 12/31/2012.)
|UpdateOur original analysis, posted September, 2011, appears just below this update. Depending on your familiarity with the research on behavioral finance, you might choose to read or review that analysis first.||September, 2012|
|2011 returns: -0.01%. Depending on which peer group you choose, that’s either a bit better (in the case of “moderate allocation” funds) or vastly better (in the case of “world allocation” funds). 2012 returns, through 8/29: 8.9%, top half of moderate allocation fund group and much better than world allocation funds.|
|Asset growth: about $25 million in twelve months, from $18 – $45 million.|
|This is a rare instance in which a close reading of a fund’s numbers are as likely to deceive as to inform. As our original commentary notes:The fund’s mandate changed in April 2008, from a traditional stock/bond hybrid to a far more eclectic, flexible portfolio. As a result, performance numbers prior to early 2008 are misleading.The fund’s Morningstar peer arguably should have changed as well (possibly to world allocation) but did not. As a result, relative performance numbers are suspect.The fund’s strategic allocation includes US and international stocks (including international small caps and emerging markets), US bonds (including high yield and TIPs), gold, natural resources stocks, global real estate and cash. Tactical allocation moves so far in 2012 include shifting 2% from investment grade to global real estate and 2% from investment grade to high-yield.Since its conversion, BBALX has had lower volatility by a variety of measures than either the world allocation or moderate allocation peer groups or than its closest counterpart, Vanguard’s $14 billion STAR (VGSTX) fund-of-funds. It has, at the same time, produced strong absolute returns. Here’s the comparison between $10,000 invested in BBALX at conversion versus the same amount on the same day in a number of benchmarks and first-rate balanced funds:
BBALX holds a lot more international exposure, both developed and developing, than its peers. Its record of strong returns and muted volatility in the face of instability in many non-U.S. markets is very impressive.
BBALX has developed in a very strong alternative to Vanguard STAR (VGSTX). If its greater exposure to hard assets and emerging markets pays off, it has the potential to be stronger still.
The case for this fund can be summarized easily. It was a perfectly respectable institutional balanced fund which has become dramatically better as a result of two sets of recent changes.
Northern Institutional Balanced invested conservatively and conventionally. It held about two-thirds in stocks (mostly mid- to large-sized US companies plus a few large foreign firms) and one-third in bonds (mostly investment grade domestic bonds). Northern’s ethos is very risk sensitive which makes a world of sense given their traditional client base: the exceedingly affluent. Those folks didn’t need Northern to make a ton of money for them (they already had that), they needed Northern to steward it carefully and not take silly risks. Even today, Northern trumpets “active risk management and well-defined buy-sell criteria” and celebrates their ability to provide clients with “peace of mind.” Northern continues to highlight “A conservative investment approach . . . strength and stability . . . disciplined, risk-managed investment . . . “
As a reflection of that, Balanced tended to capture only 65-85% of its benchmark’s gains in years when the market was rising but much less of the loss when the market was falling. In the long-term, the fund returned about 85% of its 65% stock – 35% bond benchmark’s gains but did so with low volatility.
That was perfectly respectable.
Since then, two sets of changes have made it dramatically better. In April 2008, the fund morphed from conservative balanced to a global tactical fund of funds. At a swoop, the fund underwent a series of useful changes.
The asset allocation became fluid, with an investment committee able to substantially shift asset class exposure as opportunities changed.
The basic asset allocation became more aggressive, with the addition of a high-yield bond fund and emerging markets equities.
The fund added exposure to alternative investments, including gold, commodities, global real estate and currencies.
Those changes resulted in a markedly stronger performer. In the three years since the change, the fund has handily outperformed both its Morningstar benchmark and its peer group. Its returns place it in the top 7% of balanced funds in the past three years (through 8/25/11). Morningstar has awarded it five stars for the past three years, even as the fund maintained its “low risk” rating. Over the same period, it’s been designated a Lipper Leader (5 out of 5 score) for Total Returns and Expenses, and 4 out of 5 for Consistency and Capital Preservation.
In the same period (04/01/2008 – 08/26/2011), it has outperformed its peer group and a host of first-rate balanced funds including Vanguard STAR (VGSTX), Vanguard Balanced Index (VBINX), Fidelity Global Balanced (FGBLX), Leuthold Core (LCORX), T. Rowe Price Balanced (RPBAX) and Dodge & Cox Balanced (DODBX).
In August 2011, the fund morphed again from an institutional fund to a retail one. The investment minimum dropped from $5,000,000 to as low as $250. The expense ratio, however, remained extremely low, thanks to an ongoing expense waiver from Northern. The average for other retail funds advertising themselves as “tactical asset” or “tactical allocation” funds is about 1.80%.
Northern GTA offers an intriguing opportunity for conservative investors. This remains a cautious fund, but one which offers exposure to a diverse array of asset classes and a price unavailable in other retail offerings. It has used its newfound flexibility and low expenses to outperform some very distinguished competition. Folks looking for an interesting and affordable core fund owe it to themselves to add this one to their short-list.
Update – 3Q2011 Fact Sheet
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