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Tickers in this Article: STT, BK, NTRS, BLK
State Street (NYSE:STT) is a leader in providing financial services including asset management, trade settlement and client reporting to institutional investors like state pension plans. Earlier this week, the Massachusetts Pension Reserves Investment Management Board (MassPRIM) decided to move approximately $720 million worth of assets from existing money managers into State Street's Global Russell 3000 index portfolio.

The reallocation of assets should make investors curious about the potential of State Street Global as an investment and watchful of how large money managers are repositioning their portfolios in an attempt to improve future returns. (To learn more about the story, read "MassPRIM axes Leg Mason, 4 Others".)

Second Quarter Snapshot
State Street reported record revenue of $2.7 billion for the second quarter of the year. The record revenue was driven primarily by its acquisition of Investors Financial Services Corporation, increases in securities finance fees (generated from spreads on securities on loan) and net interest revenue. Although State Street's assets under management did drop slightly to $1.89 trillion in comparison to the same period a year ago, institutional money managers are still turning to the Boston-based financial services provider. At the end of July Lazard Asset Management selected State Street to handle investment management operations of its $134.1 billion in assets.

New Investment Direction
The assets reallocated to State Street by MassPRIM were part of a larger move of a total $1.8 billion reallocated to new money managers focused on portable alpha strategies like BlackRock's (NYSE:BLK) Alternative Asset Management group. Both the investment in the State Street Global Russell 3000 index and the funds flowing into portable alpha strategies are meant to move the pension fund away from active asset management in favor of indexes and other investment vehicles that allow for more diversification. For individual investors the implication is to consider adding exchange traded funds (ETFs) that track indexes or non-correlated asset classes in order to operate like institutional money managers. (To learn why active management may not be worth the price tag, check out Words From The Wise On Active Management.)

Competition
Similar institutional financial services are provided by the Bank of New York Mellon Corporation (NYSE:BK) and Northern Trust Corporation (Nasdaq:NTRS).
Last year State Street
generated total revenue of $9.97 billion while BNY Mellon and Northern Trust reported $14.5 billion and $4 billion respectively. The operating margins for each were 34% for State Street, 33% for BNY Mellon and 35% for Northern Trust.

Final Thoughts
State Street's stock is up about 13% over the last 30 days, due to a higher earnings outlook for the year. If more large institutions continue to outsource their asset management operations or adopt the passive approach for their asset management
methodology State Street
may be a primary beneficiary of assets in search of new life.

To learn what effect institutional investors have on the stock market, see The Market Participant Playbook.

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