From the September 2008 issue of Wealth Manager Web • Subscribe!

September 1, 2008

The Maestro of JPMorgan Funds

JPMorgan Asset Management--the name conjures up the scent of old money, gentlemen's clubs, cigar smoke and above all, a kind of stodgy blue-chip security. But hedge funds, behavioral finance, 130/30 funds? No way! Of course, if you're among the legions of wealth managers who already use any of the firm's 120 mutual funds to build client portfolios, it's no news to you that JPMAM is one of the most innovative and prodigious fund originators in the business. In recent years, JPMAM has introduced roughly 12 new funds a year--32 over the last few years, making it second only to Fidelity--according to George Gatch, CEO and president of JPMorgan Funds which handles more than $300 billion in assets.

Some of this activity correlates to the history of mergers and acquisitions that culminated in 2004 when the Bank One Corp. merger became part of the firm known today as JPMorgan Chase & Co. Gatch, who has been with Morgan for 21 years, was there through it all. In fact, two years ago he was named "Fund Leader of the Year" by Institutional Investor for overseeing the merger of Banc One and JP Morgan--the largest mutual fund merger in U.S. history.

If you're not yet among the wealth managers who do business with JPMAM, prepare to be courted. Recently, Gatch appointed Steve Lundquist to head the RIA channel, a responsibility previously covered by Gatch as CEO. "We've had a position in the RIA area for some time," Gatch told Wealth Manager recently, "but basically, I've been leading this effort in addition to serving as overall chairman. As a result of the growth in this area and the number of events we're planning, it seems like now is the right time for someone to do it on a full-time basis."

In fact, in addition to a plethora of recent studies indicating that RIAs are the fastest growing segment of the financial services industry, JPMAM commissioned a Moss Adams survey to explore the impact of advisory firms that offer sophisticated products and services to their clients. Gatch delivered the findings in a white paper prepared for the firm's Alternative Investments Forum in San Francisco on July 24. (The forum, designed for RIAs, will be repeated in New York City on Oct. 16 and in Houston Oct. 23. Details are on the Web site at jpmchase.com in the advisors section.)

"We wanted to investigate what makes a profitable advisory practice. The study found that firms that offer a wide range of services are the ones that are succeeding and competing for market share...suggesting that firms that implement alternatives have the ability to attract a wealthier client base," Gatch said. "And the right client base is more economically powerful to advisors than maintaining better operational efficiency by avoiding the added costs of employing alternative strategies.

Is this JPMorgan's version of "Value Added?"

Value added has to be the most overused term in the industry! It's marketing fluff! What we're trying to do is to bring our insights to advisors to help them bring outstanding service to their clients. For example, in April 90 RIAs from firms that collectively manage $50 billion in assets attended our 10th Annual Wealth Management Symposium at the University of Chicago. We don't talk about products; we bring in outside speakers--a global economist, a geopolitical expert, an author on behavioral finance. Of course we want [advisors] to buy our products, but we want to be intellectually stimulating.

And you also hold Alternative Investment Conferences for RIAs? How are these different?

Most of the high-end RIAs we focus on are looking for something they can't get from most retail providers who don't have our experience in handling money for high-end investors--sophisticated solutions for high-net-worth clients. When I say "RIAs," I'm talking about some 1,100 Registered Investment Advisors who handle more than $100 million in fee-based accounts and typically clear through Schwab, Fidelity, TD Waterhouse, Lockwood. There is a lot of competition [for their business], but most mutual fund companies take the same approach with all channels. Our program takes an entirely different approach. It is more sophisticated, more targeted to their needs than our competitors'. We cover private placements, alternative investments like hedge fund of funds, third-party structured investments and real estate. And we also offer some real intelligence about how the advisor marketplace is growing.

It's somewhat surprising to see how wide a range of funds JPMorgan offers, some of them obviously the result of all the mergers and acquisitions that created JPMorgan Chase. How do you hold together so many disparate entities?

Despite all the mergers we've gone through, our asset management culture--a long-term approach with decisions made by asset managers who thrive in that culture--is why we're where we are today. We've been very successful in integrating portfolio management teams over the years.

You even offer a group of funds--the Intrepid Funds--that are based on behavioral finance. How does that work?

In Europe, we pioneered using behavioral finance as a way to develop investment strategies in 1992. In 2003, we launched the Intrepid Funds for U.S. clients. Now we manage more than $75 billion in behavioral finance strategies globally--value, growth, core, multicap, international in Europe and Japan. The [Intrepid] funds are designed to profit from human emotions, from the fact that people are consistently irrational, that the market has a herd mentality. With a dispassionate investment process, you can avoid some of the behaviors humans have developed. These funds have been in the top decile for five years!

You also offer a 130/30 product managed by a colleague who has been with the firm for 32 years?

True. The 130/30 is a long-short strategy that gives the manager, Tom Luddy, the flexibility to do a lot of things. It's sector neutral. The portfolio manager invests in large-cap companies focusing on stock selection within the sectors. He thinks it's a better way of managing money. Being able to short stocks gives him that extra tool. Our US Mutual Fund is the largest 130/30 in the industry and has one of the longest track records.

And what can you tell us about the Highbridge Statistical Market Neutral Fund?

We think there are new technologies, new tools, new ways to manage money. We're able to be innovative in terms of our offering to clients by providing new opportunities for investors like the Highbridge Statistical Market Neutral Fund which is uncorrelated with the direction of the equity markets.

On the other hand, you haven't launched any ETFs--the current market darlings. Do you have any plans to do so?

ETFs have had an effect on the asset management business and so on us as well. Passive management investing has become an important part of the industry for the foreseeable future. But we're an active manager. We believe that the markets are inefficient, that there are anomalies in pricing that exist and continue to exist. ETFs are the extension of a long study at the expense of index funds, not at the expense of active funds. Our investors want to make tactical plays. We'll continue to look at that market, but I don't think ETFs are an important threat to us.

Do you think portfolio management is going to undergo a change?

Ten years ago, the average private banking client kept his money in cash, bonds, mutual funds, U.S. Treasuries and international stocks. Today, that has expanded, now including real real estate for instance. Both high-net-worth clients and institutional clients expect returns to be lower in the future. Broadly speaking, in terms of asset allocation for the high-net-worth market, we would expect to see a reduction in U.S. equity and fixed income, and a movement toward international and alternative strategies. It has already happened in the institutional area.

Are there any things that won't change?

You know, whether it's a financial advisor or a 401(k), whether the horizon is short, medium or long--it's an awesome responsibility to take someone's money and have them trust that you'll give it back to them better than when they gave it to you.

Nancy R. Mandell is managing editor of Wealth Manager.

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