This month, BFI speaks with Peter Yi, Northern Trust Asset Management's Director of Short Duration Portfolio Management and Head of Taxable Credit Research. We discuss Northern's history and presence in the ultra-short sector, cash segmentation and a number of other issues below. Our Q&A follows (We published the first half of this interview in our August Money Fund Intelligence.) Note: This profile is reprinted from the August issue of our Bond Fund Intelligence publication. Contact us if you'd like to see the full issue, or if you'd like to see our BFI XLS performance spreadsheet, our BFI Indexes and averages, or our most recent Bond Fund Portfolio Holdings data set, which was published last week.
BFI: Talk about the non-2a-7 vehicles. Yi: A lot of people recognize Northern Trust for its significant presence in SEC-registered money market mutual funds, but that only represents about half of our liquidity-focused AUM.... Looked at more broadly, we focus on designing solutions, whether they're commingled or customized through separately managed accounts. Our product offerings range from registered money market mutual funds, roughly about $117 billion, to our collective and common STIFs, which represent probably about $50 billion. Our global offshore funds represent about $22 billion in three different currencies: U.S. dollar, euro and sterling.
The rest of our assets are customized SMAs or securities lending reinvestment vehicles. [The other pools are] important because it gives us scale, which is critical to being competitive. In addition to our $238 billion [in 'cash'], we also have roughly $20 billion in ultra-short assets under management, which has been a real growth area for us and certainly a strategic focus over the last few years.
BFI: Talk about cash segmentation. Yi: I think investors have really embraced cash segmentation as a strategy, and one that provides a better risk-reward and even a better yield. Despite the inverted yield curve, there's still a better yield in our ultra-short total return products than there is in our money market funds. We think it's just another thing that differentiates Northern Trust A.M. when we talk about taking an intelligent solutions-stage-based approach to cash management.
We introduced cash segmentation as a strategy well over a decade ago. We know how to use it effectively; it's allocating cash into different buckets. Over that time, we've certainly challenged our clients to truly rethink cash in a way that optimizes expectations for risk, liquidity and return. For those clients that are looking for a little more customization, a better risk reward balance, they're the ones that have fully embraced cash segmentation. In the strategy, they have an opportunity to segment into three distinct buckets that have distinctive risk, return and liquidity expectations. The three buckets are for operational cash, reserve cash and strategic cash.
Operational cash is the biggest bucket right now and that's indicative of the inverted yield curve. A lot of investors are choosing to shift their allocations into more operational, and that's for their immediate or short-term spending needs, using our most conservative government money market fund. They use it as a sweep vehicle for their everyday cash balances. Next you have reserve cash, which is for intermediate spending needs. It provides a little more flexibility for a better balance between having a high-quality credit portfolio and return expectations that are better than a government fund but could also have some minimal principal fluctuation.... Prime funds are the ones that work best in that bucket.
Then you have your strategic cash, which is for the longer-term cash needs, usually a three-to-six-month time horizon. Ultra-short fixed income strategies meet that bucket very well. They're going to have the durations of six months to a year. And you can also see higher yields today on a taxable ultra-short product versus a prime fund. We're seeing yield differences between 10 and as much as 40 basis points.
As relates to ultra-short, we have a full range of short duration products and strategies. Just like for our money market business, we have a very long history managing ultra-short fixed income funds. It used to be called 'enhanced cash' but it's evolved into ultra-short and we've been managing such portfolios since the late 1980s. We've seen incredible growth in that asset class over the last few years. We launched our first two ultra-short fixed income mutual funds in 2009 and the AUM has really grown exponentially since then. Right now, we have two flagship mutual funds, a taxable and a tax-advantaged fund that in total have about $6 billion. We manage about $20 billion in all of our ultra-short mandates.
The success in our ultra-short strategies really validates our view that clients still value a high-quality portfolio, where they're looking for a better risk return and are comfortable with a total return type of structure. These investors, just like those in our money funds, appreciate a proven investment process and track record, again differentiated, in a total return product. It's different than a traditional money market fund. Over time, and even recently, including presently when there is a little bit of an inversion in the yield curve, ultra-short strategies are providing better returns than money market funds. So when you can blend them all into a cash segmentation strategy, we feel that you do get a much better risk reward and a better balance, and you're doing more to optimize your opportunities.
BFI: Any thoughts on "fin-tech" or AI? Yi: I don't necessarily think the evolution of various fin-tech platforms is a bad thing or puts stresses on asset managers. As an industry, I think we should embrace the efficiency and the powerfulness of these new tools since they enable us to be better investment managers. Whether it's to address new regulatory constraints for broker dealers or to find new inefficiencies in the marketplace to exploit in other risk asset classes, we all need to recognize more is coming. I like to draw somewhat of a parallel to when we saw a huge shift over a decade ago with the full-service broker-dealer model shifting to independent platforms. You can actually say that's where fin-tech platforms started to surface.
Then we had the algorithmic trading which became more commonplace for, I guess other risk asset classes beyond money markets. But now it's AI and it's something that's being explored and could become a really powerful tool for asset managers, for everything from running commentaries to digital investment platforms. To us, we think there's an incredible amount of benefit from investing in AI, and at the end of the day that's going to translate into a better service model and better results for our clients. That's where I think fin-tech is penetrating more in a meaningful way right now, just through the AI channel.
