US - Northern Trust has lost US$2.4bn (e1.9bn) in equity and fixed income indexed mandates and a custody mandate after the Illinois State Board of Investments (ISBI) terminated its contracts with the firm.
The US$10.2bn ISBI retendered both mandates because it had learned that Northern Trust misreported the percentage of minority brokers it used to process the scheme’s business and after being informed that three senior members of Northern Trust's quantitative business had quit.
Jim Creighton, CIO of quantitative business, Patrick Canon, head of domestic desk for quantitative, and Peter Kuntz, head of the international desk for quantitative business, all departed at the end of July. All three men had come to Northern Trust after the firm acquired Deutsche Bank's passive business.
“When you had the changes at the index fund, it caused us to rethink the whole thing,” said William Atwood, executive director of ISBI.
While the state board requires 15% target for minority broking, NT’s total when including securities lending was only 13%.
It wasn't that they came up short, the critical issue was that the reporting was all wrong, Atwood said. The question is, it's not rocket science here - why was it misstated, and how can we be sure that this mistake won't happen again?
In a statement, Northern Trust said they were “disappointed” that the fund had not retained the firm, but said the loss of the business would not have a “material” impact on its financial condition.
“It is important to note that the quality of Northern Trust’s custody service and investment return performance never came into question,” Northern Trust said.
Meanwhile, the Teachers Retirement System of the state of Illinois (TRS) has placed Northern Trust on their watch list as a result of the personnel change, said John Day, TRS spokesman. Northern Trust manages a US$1.4bn indexed mandate for TRS.
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