active equity solutions
QUALIT Y DIVIDEND FOCUS STRATEGY Delivering a High-Quality, High-Yield Portfolio
For investors seeking strong relative performance and yield potential, Northern Trust offers a Quality Dividend Focus (QDF) strategy. Designed to deliver consistently strong performance and manage risk relative to a benchmark, QDF invests at the intersection of high-quality and high-dividend-paying stocks within a well-diversified portfolio. ADVANTAGES OF NORTHERN TRUST’S QDF STRATEGY
QDF is a core investment approach designed to: ■■ Deliver 100 – 200 basis points of excess return over a full market cycle ■■ Generate income of 1.5 to 2 times the benchmark yield ■■ Reduce uncompensated risks to produce consistent returns, lower volatility through proprietary portfolio construction ■■ Outperform in most market environments ■■ Address specific needs, constraints through customized portfolio management QDF DESIGNED TO outperform
We construct customized portfolios of high-quality, high-dividend-paying stocks through a proprietary portfolio construction process.
Dividend-Paying Universe
High-Quality Stocks
Proprietary Portfolio Construction Client-
Tailored Northern Trust’s QDF portfolio construction process Portfolio leverages several features to help deliver strong relative performance and yield potential: ■■ High-quality investments selected based on fundamentally driven quantitative analysis ■■ Alpha sources from combining quality and yield characteristics ■■ Risk control designed to minimize uncompensated risks such as sector concentration, security risk, style tilt and beta exposure ■■ Customization from our ability to tailor portfolios to meet your specific needs
REDUCED VOLATILITY, ENHANCED RETURNS
Application of our proprietary quality model to high-dividend-yielding stocks, which often exhibit high historical volatility, is designed to enhance returns and manage volatility. Developed and tested by Northern Trust, the quality criteria – defined by firm profitability, management efficiency and strong, liquid balance sheets – indicate superior corporate earnings that significantly dampen price volatility. QDF’s proprietary portfolio optimization (see Table 1) then further reduces relative volatility and improves return consistency by managing sector concentration, security risk, style tilt, beta exposure and other uncompensated risks.
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Investing at the Intersection of Top Quality, Top Yield
Graph 1: Cumulative Returns (1979 – 2011 Unconstrained Research Backtest Study) $45,000
Research shows that the combination of high-quality and high-dividend-yielding stocks outperformed the index over the study period. The green line shows that the intersection of top-quality and top-yielding stocks performed better than either factor on a stand-alone basis.
$40,000 $35,000 $30,000
Annualized returns over total time period: Intersection Top Quality/Top Yield 19.9% Top Quality 17.7% Top Yield 15.4% Russell 3000 11.3%
$39,438
$25,000 $21,844
$20,000 $15,000
$11,279
$10,000 $5,000
$3,399 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
$0
Intersection of Top Yield and Top Quality
Top Quality
Top Yield
R3000
Source: Northern Trust Research, Wilshire Atlas Backtest analysis of the two top-ranking quintiles of high yield and quality, measured using Northern Trust proprietary quality model criteria. The Russell 3000 benchmark used for example purposes only. The QDF strategy is available using various U.S., regional and global benchmarks.
QDF Methodology reduced Volatility, Enhanced Returns
Table 1 shows backtest research results applying the QDF proprietary portfolio construction process to a combination of the highest dividend-yielding and the highest-quality stocks, demonstrating that the QDF strategy delivers outperformance with lower volatility.
Table 1: Statistical Analysis Relative to the Russell 3000 (1979 – 2011 Optimized Backtest Study)
Annualized Return Annualized Volatility Information Ratio
QDF
Russell 3000
Excess Return
14.10%
11.28%
2.82%
16.32
17.24
0.70
—
Source: Northern Trust Research, Wilshire Atlas The Information Ratio is the ratio of a unit of alpha (excess return) the manager achieved for every level of excess risk the manager assumed: the higher the information ratio, the higher the active return of the portfolio, given the amount of risk taken.
MARKET ENVIRONMENT PERFORMANCE
QDF portfolios are designed to outperform in a variety of market environments. Based on our optimized 1979 – 2011 backtest, the strong relative performance of the QDF strategy persisted in ■■ Rising and falling short-term interest rate environments, ■■ Rising and falling long-term interest rate environments, and ■■ Small- and large-capitalization market cycles. QDF tends to underperform during periods of speculative excess, consistent with the high-quality characteristics of the QDF approach.
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CUSTOMIZED PORTFOLIOS
Northern Trust can customize QDF portfolios to offer investors a choice of various U.S., regional and global benchmarks, and adjustments to yield and beta exposures. We can also integrate specific constraints into the portfolio construction process and accommodate American Depository Receipts-only implementation. Taxable institutional clients can benefit from the dividend-received deduction, and the QDF strategy can facilitate further active tax management including control over gain- and loss-realization. COMBINE QUALITY, YIELD
The QDF investment process incorporates two critical steps: First, we use our proprietary quality analysis to identify high-dividend-paying companies that meet our quality criteria. Then we construct portfolios with these stocks using our optimized approach, controlling relative risk through diversification and tailoring for client-specific guidelines.
Management Factors
Profitability Factors Verify financial performance reliability, sustainability
Distinguish companies with cash available that we believe are likely to maintain or increase dividends over time
Alpha Sources
Dividend Yield
Proprietary Quality Score
Gain/Loss Realization
Diversification
Risk Estimated Tracking Error
Proprietary Optimization
Benchmark Sector, Security, Regional Constraints
Client Specific
Portfolio Guidelines and Restrictions
Portfolio Manager Review
Volatility – Beta Adjustments
Consider the impact of management activities on future financial performance
Cash Factors
Quality Dividend Focus Portfolio The Quality Dividend Focus strategy is customized for client-specific objectives.
QUALITY, RISK MANAGEMENT EXPERTISE
At Northern Trust, active equity strategies incorporate quality and apply innovative, integrated risk management and research. Our 40-plus years of experience focusing on high-quality investing led to the development of the QDF strategy, which is designed to maximize excess return while minimizing uncompensated risk. FOR MORE INFORMATION
To learn more about Northern Trust’s QDF strategy, please contact Tom Benzmiller, +1 312-557-3322,
[email protected]. For existing clients, please contact your relationship manager.
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The preceding information is intended for one-on-one use with current or prospective clients of Northern Trust. Information is confidential and may not be duplicated in any form or disseminated without the prior consent of Northern Trust. The information does not constitute investment advice or a recommendation to buy or sell any security and is subject to change without notice. Northern Trust and its affiliates may have positions in, and may effect transactions in, the markets, contracts and related investments described herein, which positions and transactions may be in addition to, or different from, those taken in connection with the investments described herein. All material has been obtained from sources believed to be reliable, but the accuracy, completeness and interpretation cannot be guaranteed. Information contained herein is current as of the date appearing in this material only and is subject to change without notice. Clients should under no circumstance rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. Past performance is no guarantee of future results. Periods greater than one year are annualized except where indicated. Returns reflect the reinvestment of dividends and other earnings and are shown before the deduction of investment management fees, unless indicated otherwise. Returns of the indexes also do not typically reflect the deduction of investment management fees, trading costs or other expenses. It is not possible to invest directly in an index. Indexes are the property of their respective owners, all rights reserved. Actual portfolio returns would be reduced by investment management fees and other expenses relating to the management of your account. To illustrate the effect of compounding of fees, a $10,000,000 account which earned a 8% annual return and paid an annual fee of 0.50% would grow in value over five years to $14,693,281 before fees and $14,356,293 after deduction of fees. For additional information on fees, please read Part II of the Form ADV or consult your Northern Trust Representative. Important Information Regarding Hypothetical Returns – Where hypothetical portfolio data is presented, the portfolio analysis assumes the hypothetical portfolio maintained a consistent asset allocation (rebalanced monthly) for the entire time period shown. Hypothetical portfolio data is based on publicly available index information. All information is assumed to be accurate and complete but is not guaranteed. Hypothetical portfolio data contained herein does not represent the results of an actual investment portfolio but reflects the historical index performance of the strategy described which were selected with the benefit of hindsight. Components of the hypothetical portfolio were selected primarily utilizing actual historic market risk and return data. If the hypothetical portfolio would have been actively managed, it would have been subject to market conditions that could have materially impacted performance and possibly resulted in a significant decline in portfolio value. Asset Management at Northern Trust comprises Northern Trust Investments, Inc. (NTI), Northern Trust Global Investments Limited (NTGIL), Northern Trust Global Investments Japan, K.K. (NTGIJ), the investment advisor division of The Northern Trust Company (TNTC) and The Northern Trust Company of Connecticut (NTCC) and its subsidiaries to offer investment products and services to personal and institutional markets. Securities products and services, including brokerage, are offered through Northern Trust Securities, Inc., member FINRA, SIPC and a wholly owned subsidiary of the Northern Trust Corporation. Investments and securities product and services are not FDIC insured, not guaranteed by any bank, and are subject to investment risk including loss of principal amount invested. Not all products may be suitable for or available to all investors. As of 12/31/2011, Northern Trust Corporation had assets under management totaling $662.9 billion.
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