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Why J.P. Morgan Private Bank likes liquid alts

Why J.P. Morgan Private Bank likes liquid alts

Citywire Asia spoke to Christopher Blum, Asia head of investments at J.P. Morgan Private Bank about the themes being recommended to clients.

Q. Tell us about your role.

A. I’ve been with JP Morgan for about 20 years now, 15 of which have been with the investment management business. In my current role with the private bank, I head up investments for Asia. I oversee all asset classes and manage the investment advisory and capital market solutions team.

Q. How big is JP Morgan’s conviction list?

A. We have about 200 funds on our conviction list. We tend to offer a few conviction choices for larger asset classes and as few as one fund for smaller asset classes with less demand.

Q. At what point would you remove a fund from the approved platform?

A. We look at the four Ps – people, process, performance and philosophy. It’s not limited to this, but it is the central tenet of how we think. If we see deviations in any of the above, it can result in the removal of funds.

We had an instance like that in 2014 with a quality manager who initially said that financials were not of adequate quality. However, when things weren’t going his way, he started investing in active financials. From a discipline perspective, that clearly didn’t work out.

Q. How many new asset management companies did JP Morgan partner with this year?

A. We have seven new partnerships so far, and this could possibly increase to 12 by early next year.

Most of the newly onboarded strategies are in the liquid alts space as we are trying to broaden our range here. On the fixed income side, we have added a couple of unconstrained and absolute return oriented strategies. We have also brought in a manager who does sustainable investing.

Q. Why the decision to add more liquid alternative funds?

A. In an environment where valuations are high and rates are low, the ability to have more flexibility in how you invest matters more now than it has in the past. Liquid alts give managers the ability to find more opportunities and control for risk in ways that may be more applicable to what our clients need. That said, they are not a one-to-one kind of replacement for hedge funds.

While liquidity is great, it could result in a situation where managers are forced to sell due to heavy redemptions, whereas in hedge funds they tend to have quarterly redemption cycles, if not longer, so it cuts both ways.

But we think that the industry is still important and provides a type of exposure that is beneficial to our clients. In the liquid space we tend to go for macro, long/short and multi-strategy funds. We don’t have any event-driven strategies as these tend to be less liquid so you can’t really structure it in a liquid format.

Q. What about thematic investing?

A. Thematic investing is very important for two reasons. Firstly, the world is changing at a rapid pace and you are leaving money on the table by sticking to traditional investing. Secondly, clients can relate to them better.

Technology is one of the  themes that we are looking at. We’ve launched a ‘Digital Evolution Strategy’ in the separately managed account format and it’s exclusive to us. What’s unique about this strategy is that the concept is similar to the Internet of Things. It is about how we  connect to devices and how they change lives so it can be anything from autonomous driving to how we shop. The manager can invest directly in these companies or on the periphery such as suppliers to these companies. It is a non-traditional way to express this theme and has been very popular. Performance has been great too.

Healthcare has also been a long-standing theme for us. Technology clearly helped speed up the drug discovery process, so that’s a secular theme. There are also rapid developments around the world that will result in more consumption of healthcare. China, for example, saw tremendous wealth creation in a short period of time. With a large population and growth in consumer income, we think healthcare will be a multi-decade play.

Q. Are you also invested in the robotics theme?

A. It is difficult to invest in a pure-play robotics theme in a publicly traded format. For instance, there’s General Electric and Stevens, which do robotics, but they are also involved in healthcare, lightbulbs and others. So when you buy a company like that, you are not sure if you’re really playing the robotics theme. I’m sure we will get a lot of demand if we were to launch a pure-play robotics strategy but if we can’t express it, we don’t do it.

Q. What’s your view on robo advisory?

A. The clear pro is that it is unbiased. There is also a secular change in communication and you see that more in Asia than in other parts of the world. Not everyone wants to speak over the phone or meet face-to-face, so a robo adviser would be a cost effective way to deliver investment advice.

The limitation comes when things don’t go the right way. When a client calls about an investment that has gone sour, we need to empathise with them and that’s something that robo advisors or chat bots can’t do. At this juncture, I think a hybridised model would be the most sensible approach.

Q. Tell us about your worst ever fund manager meeting.

A. A manager had shown bad performance so the due diligence team investigated to find out what happened. The manager was evasive and said to them ‘Listen, you should trust me on this, I know the performance and it’s fine.’ It was not the response we were looking for. It was lacking in humility and trust only goes so far. As Jamie Dimon says: ‘trust but verify’. I think he is right.

This feature appeared in Citywire Private Wealth magazine's 2017 Asia Selector supplement.

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