April 14, 2024

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Tightly managing risk may be key for financial performance

“Our primary function as an active asset manager is to deliver performance on a risk-adjusted basis,” said Patrick Thomson, CEO Emea, during an interview on 14 March 2024 at the International Media Summit organised by J.P. Morgan Asset Management in London.

To make sense of the recent developments on the geopolitical events, inflation, monetary actions, fiscal policies and the transition to net zero, Thomson explained that his firm makes available a “a lot of research” to clients.

Through its guide to market, guide to retirement, guide to alternatives and the guide to ETFs, they aim to educate intermediaries and clients about “the important factors that you need to consider when assessing an investment.” He understands that fiduciary responsibilities mean “we put our clients’ interests first” but also “how can I make or help my clients make the best possible decisions?”

Private assets: some generalities

Thomson pointed out that JPMAM manages around $240bn in alternatives, “a significant and rapidly growing business” that offers private equity, private credit, infrastructure and real estate assets.

Through education (guide to alternatives), he thinks that his clients can get basic and sophisticated understanding of some of the pitfalls, challenges and opportunities and “the right balance between private and public assets.” He understands that the illiquid feature of infrastructure, for instance, will have to be explained thoroughly to clients.

Thomson noted the challenges related to company listings, which has prompted several companies to go private. “I think the authorities, the regulators, are keen to encourage more capital into productive finance… supporting companies on their path to net zero.” Thomson is encouraged by the development of the next generation of Eltifs. As for Ucits funds, he thinks it will take a bit of time before the product flies, but there is a “very high degree of confidence in the regulatory regime.”

Could selling active ETFs on SMEs make more sense than selling private equity funds?

Given the long history 30 years of JPMAM in covering listed small caps and its claimed ability to beat benchmarks, in general, it comes a bit as a surprise to Delano as to why the firm is not promoting its listed SME products as a more adequate product to private equity investments packaged into an Eltif to retail investors. Indeed, ETFs on SMEs, active or not, offer retail investors higher liquidity and a better visibility on valuation, every day.

By and large, again, huge generalisation, you can get a price much easier for small caps than you can for private equity

Patrick Thomson

Patrick ThomsonCEO EmeaJ.P. Morgan Asset Management

Thomson thinks that companies that are private and remain private “have a very different risk profile, in general, to a listed small cap company.” He added: “you have venture, growth equity and large caps… [and they] have different characteristics that some investors find attractive. Those are different to small caps. They’re not analogous.”

Delano understands that some private companies may offer extraordinary opportunities with business profiles not available to investors focusing solely on listed products. History has shown that there are also extraordinary opportunities on listed companies as well and, importantly, an exit strategy is much easier to manage.

Thomson commented that: “By and large, again, huge generalisation, you can get a price much easier for small caps than you can for private equity.” As private equities are not listed, “you have to go to the secondary market [to get liquidity]… and typically, it is less liquid.”

Educating and offering choices are the deciding factors

“We want to provide our investors choices… and I believe that alternatives have a role to play in most portfolios,” argued Thomson. “I’m not going to make a judgement, which is better, which is not because fundamentally, our job is to provide choices to our clients and inform [them that] venture capital, typically targets a much higher return than large cap buyouts… to attract investors to take the liquidity and the enterprise risks.”

Thomson explained that their job is inform clients about risks and returns and “the right structure to invest in them…. our experience has been, there is demand for all types of private equity and small caps.”

Delano thinks that it all boils down for investors to determine whether the potential return upside of private equity accounting for higher management costs compared to ETFs will compensate and offset the lack of liquidity and visibility on valuation.

How is J.P. Morgan Asset Management important within JPMorgan Chase?

“Asset wealth management is a very prominent division within the four main divisions of the bank,” said Thomson. He explained that the division contributes around 15% of the earnings of the group whereas it uses very little capital from the bank.

Contrary to the investment banking division, Thomson thinks that its division is in a sweet spot when dealing with the banking analyst investor community as it contributes predictable “annuity revenues with low capital… in a world of high and rising interest rates and much more regulation, i.e., Basel.” He added: “there is power in diversified earnings.”

Bringing businesses together when regulation permits

Beyond the investments undergone by asset management for its investment process and decision, Thomson explained that his division can rely on the resources of the bank for cybersecurity, “an incredibly important component for running a healthy and safe business…. we are inside the JPMorgan firewall.”

Elsewhere, Thomson commented that JPMAM partners with the bank in the UK to run model portfolios on behalf of the digital bank to support their robo-advisor.

How to prepare asset management for a more aggressive Russia

Russia “is not like any other risk, but it is a major risk,” stated Thomson. He explained that JPMAM makes sure that “portfolios are well diversified, and they’re not overly exposed to a single factor.”

Thomson related to the bank CEO, Jamie Dimon who “has a very developed appreciation of risk.” Its “fortress balance sheet” concept, which ensures that “it is not overly exposed to something,” is echoed in the risk management discipline at JPMAM.

Through an independent risk management function, Thomson explained that JPMAM systematises risks, optimises, runs scenarios, stress tests and has in place “a series of protocols in the event that something horrendous happens.”

The benefit of protecting investors, he thinks also allows JPMAM to take advantage of opportunities. “When there is an unexpected event in one part of the world, that means all things being equal, there may be opportunities to invest in another part of the world.”

Delano was invited to attend the J.P. Morgan Asset Management International Media Summit in London. The latter paid for accommodation and transportation.

This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .