State Universities Retirement System of Illinois Serving Illinois Community Colleges and Universities 1901 Fox Drive Champaign, IL 61820-7333 (217) 378-8800 (217) 378-9802 (FAX) To: Investment Committee From: Lou Ann Fillingham, CPA Date: September 2, 2011 Re: Northern Trust Master Custodian Review Investment Department Overview Northern Trust has served as global custodian for SURS since 1984. A search for a global custody provider was initiated by the Board of Trustees in November 2006 and concluded at the June 8, 2007, Board of Trustees meeting when The Northern Trust Company was approved as SURS master custodian. The custodian performs several functions for SURS, including securities safekeeping, trade execution and settlement, foreign exchange, income collection, tax withholding and reclamation, valuation, investment risk monitoring, performance analytics, corporate actions, class action filings, accounting and reporting. Organization Northern Trust Corporation is the parent company of The Northern Trust Company, the principal subsidiary which is composed of two core business segments. The Corporate & Institutional Services (C&IS) business unit, which provides institutional custody services to SURS, supplies trust, custody, investment management and information services to institutional clients worldwide. The Personal Financial Services (PFS) business unit delivers trust, investment management and banking services to high net worth individuals and families. These two core business segments are supported by Operations & Technology (O&T) and Northern Trust Global Investments (NTGI), which currently provides SURS with indexed U.S. equity investment management services. Northern Trust s culture is undiluted by mergers. The organization has not been involved in any large-scale corporate restructurings that impacted its systems, personnel, or ability to provide service to clients. When Northern Trust has been involved in acquisitions, the purpose has been to expand its current product capability or geographical presence rather than to acquire the clientele of its competitors. Acquisitions over the past year have included Waterline Partners, LLC, an investment advisory firm; Omnium LLC, a hedge fund administrator; and the fund administration, investment operations outsourcing, and custody business of Bank of Ireland Securities Services. Northern Trust does not anticipate any significant organizational changes in the near future that would impact its business model, organizational structure or ability to deliver services to clients. Northern Trust s institutional services management team has been stable over the past year. Significant changes to senior management staff over the last year are listed, below.
Current Position at Northern Trust Former Position at Northern Trust William L. Morrison President and Chief Operating Officer Chief Financial Officer Michael O Grady Chief Financial Officer n/a Sherry Barrat Vice Chairman of the Corporation President of PFS Steve Fradkin President of C&IS COO of Northern Trust Jana Schreuder President of PFS President of O&T Joyce St. Clair President of O&T Executive Vice President and Head of Corporate Risk Management Jeff Cohodes Head of Corporate Risk Management Executive Vice President and Head of Business Practices & Market Segments in PFS Services Pete Cherecwich Head of Global Fund Services and Chief Operating Officer of C&IS Chief Operating Officer of C&IS Wilson Leech CEO for Northern Trust s Europe, Middle Head of Global Fund Services East, and Africa (EMEA) Region Biff Bowman Head of the Americas for C&IS CEO for Northern Trust s Europe, Middle East, and Africa (EMEA) Region Lee Selander Retired from Northern Trust Head of the Americas for C&IS As of June 30, 2011, Northern Trust had total corporate assets of $92.7 billion and a capital base, measured as total capital, of $7.1 billion. Northern Trust had 1,214 U.S.-based custody clients with total assets in excess of $1.7 trillion, including 559 U.S.-based global custody clients with $367 billion in global assets under custody. During 2010, Northern Trust gained 73 custody clients and lost 37 for a net gain of $49.7 billion in assets. The primary reason that clients transition away from Northern Trust is due to consolidation of assets with another provider, often because of a merger or acquisition. Other reasons clients transition away from Northern Trust include fees, existing relationships at another provider, and credit or diversification of providers. The mean custody account size at Northern Trust is $1.9 billion and the median custody account size is $274 million. Other large public fund master trust/custody clients serviced by Northern Trust include the Public Employees Retirement Association of Colorado, State of Tennessee, Illinois Municipal Retirement Fund, Utah Retirement Systems, and Kentucky Retirement Systems. Approximately 74% of Northern Trust s corporate revenues are derived from fee-based, noninterest activities and the remaining 26% of revenues are received from net interest income. The Corporation currently has a long-term unsecured debt rating of AA and Aa3 from Standard & Poor s and Moody s rating agencies, respectively. Client Service As of June 30, 2011, Northern Trust had 13,350 total active employees worldwide, including 9,166 individuals dedicated to supporting the worldwide institutional asset servicing business. Currently, Northern Trust has 467 institutional client servicing staff worldwide, of which more than 200 are custody relationship managers. Of the total, 83 relationship managers are located in U.S. offices. In addition, 74 account managers support Northern Trust s institutional custody clients. An average of five relationships is assigned to each relationship manager. Accounts are assigned by considering a relationship manager s current account load and then matching clients with similar needs and plan configurations. This process provides clients with a
relationship manager who has the experience and knowledge to service the clients needs. In addition, Northern Trust has assigned a back-up relationship manager and a back-up account manager who have been cross-trained to ensure cohesive client servicing to SURS. SURS has been assigned a group of professionals whose background and experience complement the account needs in asset services, information services, decision support and asset management. The team has been largely unchanged over the past year. The following table identifies the Northern Trust staff currently responsible for SURS account. NORTHERN TRUST CLIENT SERVICE TEAM Name Title Dennis Anosike Division Manager Patricia Somerville-Koulouris Relationship Manager Gary Guibert Back-Up Relationship Manager Mark Thein-Wai Account Manager Amy Sproull Back-Up Account Manager Jeff Feeney Risk & Performance Services Manager Amy Bacich Investment Performance Consultant Michael Oberlin Investment Performance Analyst Chris Gilbert Private Equity Performance Consultant Brian Karmowski Private Equity Analyst Don Pollak Northern Trust Global Investments Investment Consultant Daniel Hynes Northern Trust Global Investments Investment Consultant Stan King Reporting Consultant Yelena Kolizher Passport Consultant, Technical Support Chris Miller Senior Investment Compliance Consultant Brigham Abbott Section Manager, Accounting/Reporting Antonio Anzo Team Leader, Accounting/Reporting Ashiki Lindsey Senior Domestic Analyst, Accounting/Reporting Rafael Anaya Senior Global Analyst, Accounting/Reporting Tori Jackson Business Process Analyst, Global Documentation Improvements Operations processing and technology are at the center of Northern Trust s business. The importance of these functions to asset servicing has led Northern Trust to undertake the key initiatives listed below. Web-based applications with technological solutions through Passport, Northern Trust s online system. Data delivery warehouse to enhance the production of consolidated reporting based upon data collected from third parties for asset servicing clients. Special and alternative asset developments to service these assets effectively. Enhanced range of investment risk and performance tools available via Passport.
Straight-through-processing (STP) processes to improve the infrastructure of local markets and promote settlement efficiency. These initiatives are specific to the organization s core technology infrastructure and are designed to support the planned product and service enhancements of improved transparency, support of clients risk management needs, and leverage of Northern Trust s global architecture. Northern Trust holds periodic concept testing sessions to better understand client requirements by asking in-depth questions about the solutions that clients consider imperative. Northern Trust undertakes asset servicing product enhancements on an on-going basis. In the past year, enhancements have included Trade Order Entry, collateral management reporting, Data Direct, exposure reporting, predictive risk analysis, and risk reporting. Northern Trust spent in excess of $1.4 billion on systems development and enhancements over the past three years (2008-2010) and has budgeted approximately $2.0 billion for the next three years. SURS investments staff and members of the Northern Trust client service team meet on a semi-annual basis to discuss current service issues and planned enhancements or changes. These meetings have been an effective means to work collaboratively to resolve issues and to remain current on recent and upcoming changes, including the following items. Private Monitor Northern Trust tracks SURS alternative investments and performance using Private Monitor, a reliable tool to assist in complying with various valuation requests and requirements. As SURS expands the alternative investments included in its investment portfolio, Private Monitor reports have become an integral part of quarterly performance and annual reporting. Northern Trust will implement additional Private Monitor analytical reports over the next year to provide expanded levels of information regarding alternative investments. Peek Through The ability to view company holdings in commingled funds, including partnerships, is enabled by look-through reporting. The service is important for identifying all portfolio holdings. SURS requested this capability when the custodian relationship was renewed in 2007. Northern Trust has encountered delays in implementing the product which is currently available for a portion of commingled funds in which SURS is invested. Data Direct Northern Trust has developed an integrated technology product, Data Direct, that reduces or eliminates the process of exporting data from its various applications. SURS has begun to test the use of the product for performance reporting purposes. Daily Performance Review/Monthly Manager Comparison Northern Trust is implementing a process to review each public market account on a daily basis for large, unexplained differences from the account s designated benchmark. Any differences outside of established tolerance levels are reported to SURS, beginning August 2011. Northern Trust also is implementing a monthly reconciliation process with managers
to identify and resolve security, price, cash, and performance discrepancies. This process is scheduled to begin for August 2011 month-end reporting. Custom Reports Northern Trust has devoted resources to reviewing and recreating standard reports produced manually by SURS that utilize data downloaded from Northern Trust s system. The custom reports are in various stages of development and ultimately will create further reporting efficiencies for SURS. Conclusion Founded in 1889, Northern Trust is a financially strong corporation that focuses exclusively on asset servicing and asset management for its institutional and private clients worldwide. The corporation s highly focused business model supports these two client bases across a single operating platform. The client service team assigned to SURS account, largely unchanged over the past year, continues to be responsive to SURS staff in addressing issues as they arise and in seeking appropriate solutions. Northern Trust provides a satisfactory level of service to SURS staff and has been pro-active in introducing products to enhance the services provided. Consultant Comments Northern Trust continues to be a major player within the global custody industry. Northern Trust came through a very tumultuous period over the last four years brought about by the worst financial crisis since the Great Depression. In response to a changed environment, Northern Trust enhanced and retooled their risk management, transparency, corporate governance and regulatory support initiatives. Northern Trust continues to develop excellence in both private wealth and institutional tax-exempt funds, and is known for client service and ease of use of their on-line tools. Recommendation SURS staff and Callan Associates jointly recommend that The Northern Trust Company be retained as SURS master custodian.