Northern Trust Universe Data: Lower Interest Rates Paved the Way for a Strong Rally in Q4

Rhea-AI Summary

The final quarter of 2023 saw a strong rally in financial markets, with the median return for institutional asset owners in the Northern Trust All Funds Over $100 million plan universe at 7.3% for the quarter ending December 31, 2023. The Northern Trust Universe tracks the performance of 406 large U.S. institutional investment plans, with a combined asset value of more than $1.4 trillion. The U.S. Equity Program universe generated an 8.5% median return for the fourth quarter, and the U.S. Fixed Income program universe median return was 5.3% for the quarter. The U.S. ten-year government bond yield fell from 4.59% to 3.88% during the quarter. The Northern Trust Corporate (ERISA) universe median return for the quarter was 9.5%, while the Northern Trust Public Funds universe median return was 6.4%, and the Northern Trust Foundation and Endowment (F&E) universe produced a 5.5% median return. The median one-, three- and five-year returns for the ERISA, Public Funds, and Foundations & Endowments universes were also provided.

Insights

Market Research Analyst

The data presented indicates a significant rebound in financial markets during the last quarter of 2023, which can be largely attributed to easing inflation and the anticipation of interest rate cuts. This positive shift has led to robust returns across different types of institutional asset owners. The performance disparity between the Northern Trust Corporate (ERISA) universe and the Public Funds and Foundations & Endowments (F&E) universes suggests varying investment strategies and risk appetites among these segments.

For instance, ERISA plans' heavy allocation to U.S. fixed income has paid off in the short term due to falling bond yields, which inversely affect bond prices. However, the negative three-year return raises concerns about the long-term sustainability of such a strategy, especially in a volatile interest rate environment. Conversely, the Public Funds and F&E segments have shown a healthy appetite for private equity, which could indicate a search for higher yields in a low-interest-rate environment, albeit with higher risk.

The performance of small cap stocks outperforming large cap stocks is a notable trend, as it may signal investor confidence in the growth potential of smaller companies, which are often more sensitive to economic changes. This could be an indicator of market sentiment shifting towards a risk-on approach.

Financial Analyst

From a financial analysis perspective, the reported median returns, especially the 12-month figures, are impressive and above historical averages for institutional portfolios. The returns reported by Northern Trust for the fourth quarter are indicative of a broader market rally, which may have significant implications for asset managers and investors looking to rebalance or adjust their portfolios in anticipation of future market conditions.

The shift in asset allocation towards private equity, particularly within the Public Funds and F&E universes, is reflective of a broader industry trend where institutional investors seek to diversify away from traditional asset classes and enhance returns. However, this shift also introduces additional layers of complexity and risk, including illiquidity and valuation challenges, which must be carefully managed.

The decline in U.S. government bond yields is also of note, as it suggests a flight to safety and a possible recalibration of growth expectations. This could have a ripple effect across various asset classes, influencing portfolio strategies and risk management approaches going forward.

Economist

The report's implications on the broader economy are multifaceted. A cooling inflation and soft labor market suggest that the Federal Reserve's policies may be taking effect, which could lead to a more stable economic environment. However, the reduction in bond yields, particularly the ten-year government bond yield, could signal market expectations of a lower growth trajectory or a response to policy shifts.

The differential performance between asset classes and investment strategies highlights the varying impact of economic conditions on different market segments. The strong performance in equity markets, especially in small caps, may reflect investor optimism about the economic outlook and corporate profitability. However, the reliance on fixed income by ERISA plans, despite its strong performance in the short term, raises questions about the potential impact of future inflationary pressures or interest rate hikes.

Overall, the economic implications of these investment trends are significant, as they may influence corporate investment decisions, consumer confidence and ultimately, the trajectory of economic recovery post-pandemic.

CHICAGO--(BUSINESS WIRE)-- Cooling inflation, softening labor markets and lower interest rates during the fourth quarter paved the way for a strong rally in financial markets to end 2023. The median return for institutional asset owners included in the Northern Trust All Funds Over $100 million plan universe was 7.3% for the quarter ending December 31, 2023. The median 12-month return for the universe was 11.3%.

The Northern Trust Universe tracks the performance of 406 large U.S. institutional investment plans, with a combined asset value of more than $1.4 trillion, which subscribe to performance measurement services as part of Northern Trust's asset servicing offerings.

The Northern Trust Corporate (ERISA) universe median return for the quarter was 9.5% while the Northern Trust Public Funds universe median return was 6.4%, and the Northern Trust Foundation and Endowment (F&E) universe produced a 5.5% median return.

“The final quarter of 2023 saw markets rally as a result of the reduction in the pace of inflation and increased hopes that the U.S. market will be able to avoid a recession,” said Amy Garrigues, global head of Investment Risk and Analytical Services at Northern Trust. “Though market volatility posed many challenges for investors during the year, we saw this shift in the fourth quarter and ended on a positive note.” The Northern Trust U.S. Equity Program universe generated an 8.5% median return for the fourth quarter, following guidance from the Federal Reserve that interest rate cuts may come sooner than previously anticipated. Small cap stocks outperformed large cap stocks, with the Russell 1000 large cap index returning 12.0%, compared to the Russell 2000 small cap index which returned 14.0% for the period.

The Northern Trust U.S. Fixed Income program universe median return was 5.3% for the quarter. The U.S. ten-year government bond yield fell from 4.59% to 3.88% during the quarter and the two-year government bond yield fell 78 basis points to 4.25%.

ERISA plan universe median one-, three- and five-years returns were 10.3%, -1.0% and 6.1%, respectively. The U.S. fixed income asset class remains the largest ERISA plans allocation with a median allocation of 53.1%, enabling the client segments to outperform the other segments as a result of rising bond prices during the quarter. The segment continues to have small allocations to alternative assets, where the median allocation to private equity is 2.3% and the median allocation to hedge funds is 0%.

Public Funds universe median returns for the one-, three- and five-year periods stood at 10.6%, 4.6% and 8.3%, respectively. The median quarter allocation to U.S. and international equity are 28.1% and 12.6%, respectively, while the median exposure to U.S. fixed income is 22.2%. The segment continues to increase allocations to private equity, where the median allocation now stands at 14.0%.

The F&E universe median one-, three- and five-years returns were 11.3%, 5.2% and 9.1%, respectively. The F&E universe Foundation and Endowment is continuing the trend to allocate funds to the private equity asset class. The median allocation to private equity now stands at 24.1%, a slight decline from the prior quarter, resulting from strong returns in the U.S. fixed income segment where the median allocation to bonds grew from 8.3% to 8.7%.

Results as of December 31, 2023:
			4th Qtr		1Yr		3Yr		5Yr
ERISA			9.5%		10.3%		-1.0%		6.1%
Public Funds			6.4%		10.6%		4.6%		8.3%
Foundations & Endowments			5.5%		11.3%		5.2%		9.1%

About Northern Trust

Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, asset servicing, asset management and banking to corporations, institutions, affluent families and individuals. Founded in Chicago in 1889, Northern Trust has a global presence with offices in 24 U.S. states and Washington, D.C., and across 22 locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of December 31, 2023, Northern Trust had assets under custody/administration of US$15.4 trillion, and assets under management of US$1.4 trillion. For more than 130 years, Northern Trust has earned distinction as an industry leader for exceptional service, financial expertise, integrity and innovation. Visit us on northerntrust.com. Follow us on X (formerly Twitter) @NorthernTrust or Northern Trust Corporation on LinkedIn.

Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A., incorporated with limited liability in the U.S. Global legal and regulatory information can be found at https://www.northerntrust.com/terms-and-conditions.

View source version on businesswire.com: https://www.businesswire.com/news/home/20240207982307/en/

Europe, Middle East, Africa & Asia-Pacific:

Camilla Greene

+44 (0) 20 7982 2176

Camilla_Greene@ntrs.com

Simon Ansell

+ 44 (0) 20 7982 1016

Simon_Ansell@ntrs.com

US & Canada:

John O’Connell

+1 312 444 2388

John_O’Connell@ntrs.com

http://www.northerntrust.com

Source: Northern Trust Corporation

FAQ

What was the median return for institutional asset owners in the Northern Trust All Funds Over $100 million plan universe for the fourth quarter of 2023?

The median return for institutional asset owners in the Northern Trust All Funds Over $100 million plan universe was 7.3% for the fourth quarter of 2023.

How many large U.S. institutional investment plans does the Northern Trust Universe track?

The Northern Trust Universe tracks the performance of 406 large U.S. institutional investment plans.

What was the U.S. Equity Program universe median return for the fourth quarter of 2023?

The U.S. Equity Program universe generated an 8.5% median return for the fourth quarter of 2023.

What was the U.S. Fixed Income program universe median return for the fourth quarter of 2023?

The U.S. Fixed Income program universe median return was 5.3% for the fourth quarter of 2023.

What was the U.S. ten-year government bond yield at the end of the fourth quarter of 2023?

The U.S. ten-year government bond yield fell from 4.59% to 3.88% during the fourth quarter of 2023.

What was the Northern Trust Corporate (ERISA) universe median return for the fourth quarter of 2023?

The Northern Trust Corporate (ERISA) universe median return for the fourth quarter of 2023 was 9.5%.

What was the median return for the Northern Trust Public Funds universe for the fourth quarter of 2023?

The median return for the Northern Trust Public Funds universe was 6.4% for the fourth quarter of 2023.

What was the median return for the Northern Trust Foundation and Endowment (F&E) universe for the fourth quarter of 2023?

The median return for the Northern Trust Foundation and Endowment (F&E) universe was 5.5% for the fourth quarter of 2023.