Northern Trust Asset Management’s Risk Report Highlights Drivers of Unexpected Portfolio Results

Analysis spans six years and comprises nearly 300 institutional portfolios totaling more than US$250 billion, plus 1,300+ investment strategies

Northern Trust Asset Management (NTAM), a leading global investment manager with nearly $1 trillion in assets under management, released today its 2022 edition of “The Risk Report,” an aggregated global analysis of 280 institutional equity portfolios which reveals six common drivers of unintended investment results.

As an investment manager that employs a quantitative risk-aware approach, NTAM regularly partners with institutional investors and their consultants to provide them with a distinct analysis of underlying risk components impacting their portfolios’ ability to achieve intended outcomes.

The analyses at the heart of “The Risk Report” identifies compensated and uncompensated risks in portfolios. This enables NTAM to recommend adjustments needed and is consistent with NTAM’s core philosophy: investors should get paid for the risks they take—in all market environments and in any investment strategy.

Active risk is necessary to generate excess returns, but not all risks are created equally. Some have been historically proven to generate excess returns over long periods (compensated risks) and some have not (uncompensated risks).

“In the current market environment, when investors are struggling with underperformance, outcomes that differ from intended results often cause confusion about how various—and often hidden—risks are impacting their portfolios,” said Michael Hunstad, Chief Investment Officer for Global Equities at Northern Trust Asset Management. “The number one question that institutions have when their portfolios don’t deliver expected outcomes is ‘why?’ By aggregating years of analysis in 'The Risk Report,' we are able to shed light on the causes.”

The 2022 edition, like its 2020 predecessor, surfaces six key drivers of unexpected portfolio results. Those include portfolio exposure to uncompensated risks and the performance-hindering “cancellation effect,” which occurs when, in attempting to target specific risks and outcomes, different asset managers unwittingly select investments that “cancel” each other out, thereby diluting risk compensation.

Despite a vastly different market environment from 2020, the fact that portfolio issues cited in the 2020 analysis remained the same in the 2022 analysis underscores the importance of several key issues, including:

Institutions had nearly two times more uncompensated vs. compensated risk

Portfolios had become overcrowded with uncompensated risks that tended to dilute the potential for excess returns, suggesting investors are not getting paid for the risks they take.

Underlying portfolio holdings canceled each other out – and hurt performance

Investment styles — such as growth and value — can at times work against each other, and underlying managers in a portfolio can take competing positions on various factors to create systematic risk cancellation. Managers within a portfolio can also compete on their weightings in single securities, subsequently creating active share cancellation.

Unintended outcomes were the result of hidden portfolio risk

Style tilts contributed 33% to active risk on average in the 2022 report — up from 29% in the 2020 report — but these “bets” commonly introduce unintended risks as a side effect. An investor might, for example, allocate to energy securities for value exposure without being aware of their underlying commodity risks, or might be overweight real estate to escape equities volatility and find themselves exposed to the corresponding interest rate risk instead.

Other key drivers of unexpected results include:

  • Impact of Style Investing: 50% of portfolios (on average) showed signs of utilizing growth, value or other conventional style investing, which often creates a mix of managers. Together, their performance closely mimicked corresponding indexes, despite having fees typical of active management.
  • Over-Diversification: Traditionally, institutional portfolios have multiple asset managers, but this often leads to diluted performance as the result of conflicting strategies and approaches that offset returns.
  • Timing Manager Changes: Investor attempts to “time” outperformance by changing managers are often ineffective, while also increasing costs.

“The Risk Report” arrives as part of NTAM’s “Risk Insights Series.” To explore all the common drivers in depth, download the “Risk Report.”

About Northern Trust Asset Management

Northern Trust Asset Management is a global investment manager that helps investors navigate changing market environments, so they can confidently realize their long-term objectives. Entrusted with US$999.1 billion of investor assets as of September 30, 2022, we understand that investing ultimately serves a greater purpose and believe investors should be compensated for the risks they take — in all market environments and any investment strategy. That’s why we combine robust capital markets research, expert portfolio construction and comprehensive risk management to craft innovative and efficient solutions that deliver targeted investment outcomes. As engaged contributors to our communities, we consider it a great privilege to serve our investors and our communities with integrity, respect, and transparency.

Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Belvedere Advisors LLC, Northern Trust Asset Management Australia Pty Ltd and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.

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 25 U.S. states and Washington, D.C., and across 23 locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of September 30, 2022, Northern Trust had assets under custody/administration of US$12.8 trillion, and assets under management of US$1.2 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 Follow us on 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


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