Even as investors have beaten a path to passive strategies,
J.P. Morgan Asset Managements actively managed funds
have gained $209 billion in assets over the last five years.
Still, JPMAM, which manages $1.8 trillion, is making a
significant investment to build out its capabilities in smart
beta. Smart beta some call it strategic beta or
multifactor investing is based on academic research into
the sources of stock and bond returns and is essentially phase
two of the index fund trend started in the 1970s. Vanguard
Group, State Street Global Advisors, and Barclays Global
Investors (now owned by BlackRock) opened up phase one with
low-cost funds designed to give investors broad market returns
by tracking well-known indexes such as the S&P 500. Smart
beta is an attempt to refine and upgrade the original index
fund. Michael Camacho, JPMAMs global head of beta
strategies, stresses that investors understand they can
access some form of alpha, in their view, by having it more
systematized and efficiently priced than ever before.
This year JPMAM will focus on developing fixed income beta
strategies, some of which will leverage the parent banks
proprietary bond indexes.
Fixed income is a less-developed application for smart
beta, in part because academic research has concentrated on the
sources of return for equity instruments. This month JPMAM
plans to launch an exchange-traded fund based on the
firms Global Bond Opportunities Fund. The ETF is designed
for a rising-rate environment by adding yield and allocating to
nontraditional strains of debt. Later this spring the firm
expects to roll out an ultra-short-duration fixed income ETF
aimed at managing credit and duration exposure. Single-factor
equity funds are to follow.
J.P. Morgan isnt starting the beta effort from
scratch. It has some capabilities within its fast-growing
multi-asset business, including alternative and hedge fund
styles, as well as simple market-capitalization-based products.
It also launched smart beta ETFs in 2014. In March the firm
hired Bryon Lake, an executive at ETF specialist PowerShares,
to expand its international ETF business. But JPMorgan Asset
Chris Willcox says some of those efforts have been under
the radar. The whole industry got itself into a mindset
of active versus passive, he says. That binary conception
worked when market-cap-weighted indexes dominated the category,
according to Willcox. Now that institutions and individuals see
the benefits of using more sophisticated passive strategies
say, rules-based filters for monetizing stocks
momentum active managers need to step in. According to
Camacho, Active managers have refined their approaches,
particularly as technology to deploy some risk premia
strategies has gotten better and better. Before taking
over as beta chief last July, Camacho co-led global commodities
in J.P. Morgans investment banking division.
Camacho says a key differentiator will be smart beta
providers technology, including the ability to run
rules-based portfolios efficiently and thus take on a large
volume of assets. In addition, clients now manually send over
portfolio information and JPMAM determines the factors that are
present, provides ideas for improving the risk profile, and
performs stress tests of different models. Camacho says the
firm will develop online features so clients can interact with
analysis tools themselves.
Its easy to understand the growth of passive and
decline of active strategies as two sides in a zero-sum game.
But passive funds are being bundled into larger actively
managed portfolios. Willcox stresses that multi-asset
investments, one of JPMAMs fastest-growing groups with
$199 billion in assets, is a key driver of the firms
smart beta build-out. The multi-asset group custom packages
investments, including equity, fixed income, and alternatives,
from across the firm for goals such as meeting a specific
liability or building a retirement plans target-date
program. The offerings increasingly put active together with
passive and alternatives, such as hedge funds, private equity,
and private debt. Pension funds and sovereign wealth funds
initially drove much of the multi-asset business when they
started forming strategic partnerships with diversified asset
managers. Now advisers and wealth managers are looking for
customized asset-allocation products for their clients as well.
For these advisers and investors, the era of choosing a mid-cap
value or technology-focused fund in isolation may be drawing to
Willcox dismisses the notion that active managers feel
trepidation about living side by side with passive styles.
Firms will need both to stay competitive in a world where
investors want help putting investments together, he says,
versus just wanting to purchase individual products: An
active shop will be dependent on having passive, if you believe
that people will be buying high-conviction active strategies in
combination with beta. And if you believe that, multi-asset
will be a big driver of flows.