Smart Beta Is Indexing 2.0

One of the world’s largest asset managers strives to build out passive offerings — without cannibalizing its active business.


Even as investors have beaten a path to passive strategies, J.P. Morgan Asset Management’s 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, JPMAM’s 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 bank’s 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 firm’s 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 isn’t 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 Management CEO 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. Morgan’s 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.

It’s 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 JPMAM’s fastest-growing groups with $199 billion in assets, is a key driver of the firm’s 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 plan’s 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 a close.

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.”