JP Morgan Asset Management (JPMAM) was a latecomer to the ETF scene, with the USD 1.7 trillion (as of September 30, 2018) firm’s reluctance to enter the fray puzzling for many. JPMAM’s first ETFs came in 2014 in the US, while 2017 saw a push into Europe.
It might be a late push but it’s been popular. The asset manager saw a 10 times increase in its ETF assets over 2018, up from USD1.6 billion in 2017, to USD16.8 billion in 2018.
Bryon Lake (pictured), International Head of ETFs at JP Morgan Asset Management (JPMAM), explains that as the sixth largest asset management business in the world JPMAM has a strong presence with clients and investors globally.
As the ETF space continues to expand and evolve: “It felt like the right time to get involved,” Lake says. “Increasingly, we hear that clients are looking to get exposure through the convenience of the ETF wrapper.”
Lake explains that he takes the view that the ETF wrapper is a technology and you can put numerous investment engines inside the ETF wrapper.
As an example, he quotes the 2018 launch of the JPST, the JP Morgan USD Ultra-Short Income ETF which offers JPMAM’s actively managed global liquidity franchise within an ETF wrapper.
“I truly believe we have a last mover advantage,” he says. “When a new technology is developed there is always an experimentation phase. We think the ETF market is at an inflexion point given you can deliver so many strategies through the ETF wrapper.”
JPMAM has products domiciled in the US under the 40 Act legislation and in Dublin under the UCITS rules.
“We have many clients around the world who are comfortable using ETF wrappers domiciled in different areas, so we see investors from Latin America and Asia all using our product ranges.”
Last year saw a firm commitment to Asia with JPMAM hiring Sean Cunningham from BlackRock iShares to the newly created role of Asia head of ETFs.
“Asia is a big user of ETFs already and so there are a number of clients comfortable with the ETF wrapper,” he says. “It’s early days but we have had strong initial success in that market, particularly with the JPST product which many investors in Asia have embraced.”
In Lake’s experience, the wealth advisers who use JPMAM ETFs like the transparency of ETFs, their ability to trade throughout the day, no on boarding process and the fact that everything from US equities to emerging market bonds can be delivered through the ETF wrapper.
“An important and big evolution for us has been the development of our equity Research Enhanced Index (REI) capabilities which combine the best of active and passive investing.”
Lake explains that their technique is to start with a benchmark and based on fundamental research seek to enhance it, in order to deliver 80 to 100 bps of outperformance.
“We think the market and wealth managers are ready to embrace this kind of innovation,” he says.
JPMAM has also launched several corporate REI ETFs which invest in corporate bonds. “Many fixed income investors are dissatisfied with how fixed income benchmarks are built because they tend to overweight the heaviest debtor in the index which builds in too much risk. We have an active enhancement which allows us to correct for that.”
2017 also saw the launch of actively managed liquid alternative ETFs, including JPMF which is exposed to managed futures’ strategies, a sector that has struggled to achieve performance in recent years.
“We are quite pleased with how it has performed,” Lake says. “When we talk to investors, they more often than not are asset allocators with a relatively longer view on the marketplace. They are always looking for alternative strategies which can diversify portfolios and offer a lower correlation to traditional asset classes. Managed futures can provide diversification benefits through different market cycles.”
JPMF is benchmarked to a cash composite plus index and, Lake says, offers a potential buffer if the market goes down.
“Right now, many investors think we’re entering a late cycle environment and are thinking about how best to prepare their portfolios for this environment. You can build up a cash position and/or incorporate more alternative strategies to provide a potential buffer should markets take a turn for the worse,” he says.
Looking forward, Lake predicts that the firm will launch more products in the equity ETF ranges, particularly in smart beta equity and even plain vanilla equity.
And he predicts that the ETF industry will continue to grow. “I think that over the next decade the industry will continue to grow at an extremely rapid pace,” he says. “There has never been a rolling five-year period since 1993 when the industry hasn’t doubled its assets under management so by 2030, it should hit USD30 trillion which is six fold what it is today.
“We think the two biggest drivers will be active management delivered through the ETF wrapper as well as delivering fixed income capabilities through the ETF wrapper, both active and passive. The US fund industry is worth about USD30 trillion as is the European one, and you can see that with similar growth rates, ETFs will play a bigger part in them.”