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Northern Trust Develops Index Methodology To Highlight Benefits Of Tax-Transparent Fund Structures

Institutional investors that utilize tax efficient contractual funds for cross-border investing can now assess the financial benefits of those structures with an index methodology developed by Northern Trust (Nasdaq: NTRS), an industry leader in the provision of asset pooling solutions to institutional investors and asset managers worldwide.

The Tax Transparent Markets Index (TTM) index, powered by Thomson Reuters, compares the after-tax performance of investments in tax-efficient contractual funds versus those in non-tax transparent fund structures for U.S. Large Cap 50, Global Developed, and European Developed indices. Each index has been constructed using a Thomson Reuters Total Return base index, assumes a tax profile of a European Union-based pension scheme, and is calculated using dividend withholding tax treaties available via regulated contractual funds.

“Institutional investors in the United Kingdom and Europe are becoming more aware of tax efficient products,” said Matt Mayer, pooling product manager at Northern Trust. “Our new index demonstrates how certain fund structures preserve the tax treatment of these underlying investors and quantify the effects of dividend tax efficiency on investment performance in these funds.”

The daily calculations are available to Northern Trust tax-transparent fund clients through Investment Risk and Analytical Services (IRAS) benchmarking. Additionally, annual data will be available externally in order to raise awareness about tax efficient vehicles.

Northern Trust has previously estimated that European pension funds investing into a MSCI World Equity index fund could benefit from savings of up to 49 basis points in a tax-transparent fund over a 10 year period. With the daily indices, investment manager clients and institutional investors can assess after-tax performance and also use them for reference when discussing tax-efficient products. For example, eligible investors may have added 74 basis points to the TR total return US Top 50 index in 2012 with transparency market rates applied. Performance for the indices in 2012 is detailed in a paper, “ Cross Border Investing: Why Fund Structures Matter,” that can be found on the Thomson Reuters web site.

Northern Trust is a pioneer in cross-border asset pooling and was the first to fully support tax-transparent funds, created to pool the assets of investors from multiple jurisdictions with multiple tax rates, investing in multiple jurisdictions. As of March 31, 2013, Northern Trust has 24 clients on its tax transparent, global pooling platform, with more than US$78 billion in assets under custody.

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