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Northern Trust Invests in Firm to Boost Active Manager Alpha
The firm has taken a stake in Essentia Analytics, which has made a business out of helping active portfolio managers get a handle on their behavioral biases and generate better returns.
Northern Trust Corp. is taking a minority stake in Essentia Analytics, which uses data analytics and behavioral finance research to help allocators and active asset managers make better decisions and improve their returns.
As part of the deal, Northern Trust’s asset servicing division will offer Essentia Analytics’ services to clients and will be able to easily connect managers’ historical trade and other data directly to the research and consulting firm. Northern Trust will also provide working capital to Essentia and help the firm expand.
Marc Mallett, director of strategy for Americas asset servicing, told Institutional Investor that the deal is part of the Northern Trust’s whole office and investment data science strategies, which help clients make better use of the data they collect, reduce costs, and improve investment performance. Essentia Analytics will help clients integrate data into their investment processes and potentially generate higher returns. It’s “about helping clients address the alpha challenge at scale,” he said.
The other key benefit of the arrangement is a direct pipeline between Northern Trust and Essentia. “That’s the lifeblood of their platform — their ability to produce analytics is driven by historical data,” said Mallett.
Essentia Analytics, founded by former portfolio manager Clare Flynn Levy, has produced good results with active managers wanting to compete with passive strategies.
In one case study published with the CFA Society Netherlands, portfolio manager Robert Davis of NN Investment Partners (now owned by Goldman Sachs) said his firm used Essentia’s behavioral analytics to understand its managers’ biases and dig into its strengths and weaknesses. He credited NN’s work with helping the firm survive the long bear market in value.
“Arguably, behavioral finance is central to value investing where implicitly investors believe the market is ‘wrong’ in core assumptions about a company, causing it to trade below intrinsic value,” wrote Davis, senior portfolio manager on the firm’s European equity team. “But as well as exploiting the behavioral biases of others, value investors are prone to several biases of their own: expectation of mean reversion, overconfidence (the investor is right, the market is wrong), loss aversion, to name a few.”