Interview: Post-QE should concern everyone, warns JPMAM’s Europe head

Massimo Greco, European funds chief at JP Morgan Asset Management, says a 0.5% return will make a big difference as central banks pull back from stimulus measures. Plus, he explains why the MiFID II boost for proprietary funds may have drawbacks.

Already one of the world’s top-ten asset managers, and usually five or six places ahead of its main Goldman Sachs-owned Wall Street rivals in industry rankings, JP Morgan Asset Management (JPMAM) still intends to gain more European market share, says Massimo Greco. That will happen once the population realises their money is “in the wrong place”.

“Consumers hold too much of their assets in bank deposits earning zero,” says Greco, who is JPMAM’s head of funds in Europe, Middle East and Africa. “People are not investing so that their wealth can grow and accumulate. With an ageing population, people can’t afford to keep their money in cash.”

In the not-so-distant future, Europeans could be putting their money in the pan-European personal pension (PEPP), a product that trade body Efama (the European Fund and Asset Management Association) supported. Greco represents JPMAM at Efama and in April this year, the European Parliament gave its approval for the PEPP. This lays the foundation, he says, for an investment vehicle that could be useful to younger, more mobile people who will have a greater need for retirement savings.

The trouble, though, is that all these new savers that JPMAM and other asset managers hope to win over to fund management products are in for a fraught investment journey. Greco, whose main business is dealing with advisers and intermediaries, says his clients are in for the same difficult ride, too, as Europe emerges from a decade of economic stimulus.

“Looking at long-term expectations for asset returns over the next ten to 15 years across asset classes, those return expectations are progressively coming down – and volatility has also been supressed in recent years, relative to its historical average. That’s very challenging.

“So we’re facing a future of lower nominal returns and potentially higher volatility. It’s not a good place to be. That makes us wonder, to what degree have our clients considered this scenario? And are they prepared? Have all the years of quantitative easing contributing to asset price inflation created a sense of complacency? Everyone should be concerned about this.”

JPMAM, he says, has put effort into educating intermediaries so that they can have meaningful discussions with their end-clients. This effort consists of providing “strong intellectual capital” through, for example, the firm’s ‘Market Insights Guide to the Markets’ programme. The aim is to help financial advisers to help their own clients make better investment decisions.

This concern about the post-QE environment is one of his biggest worries, he says. Part of the answer to these challenges lies with active asset management, where skilful portfolio managers will make “every basis point count”.

He adds: “Generating 0.5% of alpha might not seem like a lot in absolute terms, but on a risk-adjusted basis, 0.5% can make a big difference. We’re paid to generate excess returns, that’s what we try to do. But everyone needs to understand the next decade is going to be tougher for investors.”

Arguably an alternative fund
From Luxembourg, JP Morgan AM distributes the JP Morgan Funds Sicav. Its numerous sub-funds span a wide range of mainly vanilla equities and bonds.

Asked about alternative investment assets and strategies, Greco says the firm is trying to develop ways to deliver alternative investments, such as real assets, to the general public within retail-appropriate vehicles that have the necessary liquidity.

There is across-the board demand for alternatives, he says, adding: “There’s some intrinsic illiquidity to these underlying asset classes, so investors should clearly understand the premium they’re being paid [in order] to take on that illiquidity risk and be comfortable with that in their portfolios for the long term.” He continues: “One of our bestselling funds, the Global Macro Opportunities Fund, is arguably an alternative product within a Ucits format that is competitively priced relative to other alternative investment strategies – so it really depends on what kind of alternative you’re talking about and how you define it.”

However, while approaching the next decade with some trepidation, Greco indicates that products and services are being developed to help clients confront fee compression and lower margins. “Efficiency is a constant effort and we’re striving to pass on increased productivity to clients, for better performance and better service,” he says.

But JPMAM is itself subject to those forces and so Greco says the firm is working to become more efficient, too. At one point in the conversation, while not discussing efficiencies specifically, he points to the significant number of products the firm has closed in the past two years. Indeed, the asset management industry in Europe is well known for having a surplus of products that – particularly when assets are small – can be a drag on profits.

“We have a programme of continuous maintenance of our product range, including merging or liquidating funds that are no longer fit for purpose or don’t add value to our clients. In the last two years, we’ve launched 125 new funds but closed 229,” he says – adding that this was 30% of the firm’s global range.

Proprietary products
The forces at work on asset and wealth management do not just stem from quantitative tightening, though. Two years on from its introduction, Greco is witnessing one of the unintended consequences of the MiFID II capital markets rules, which are considered to have reduced the number of fund managers that distributors want to work with and the number of funds they would sell.

“Intermediaries are putting more emphasis on proprietary products, and with that comes greater reliance on sub-advised structures, meaning that distributors that would have previously used more third-party funds are now setting up proprietary funds on their own platforms and partnering with asset managers like JPMAM to sub-advise those investments,” he says.

Using proprietary funds allows intermediaries to “capture a bigger slice of the value chain”, he notes, as the dynamics and economics of fund distribution change under MiFID II. “Moreover, using proprietary funds significantly reduces the complexity of handling MIFID II requirements.”

How’s that?
He explains with reference to Key Investor Information Documents (KIIDs) – part of the unavoidable regulatory paperwork within fund distribution – and the requirement for distributors to check client suitability for products.

“Let’s say you’re a wealth manager who previously sold four different US equities funds to your clients. You had four KIIDs, four sets of paperwork. Instead, now you sell your own fund, which is managed by the same underlying investment manager – one KIID, one suitability check. So, using proprietary funds is one way to reduce complexity with clients.”

It’s a trend that was in place before MIFID II, he says, but it has accelerated as intermediaries work with fewer and bigger asset managers, forging sub-advisory relationships. JPMAM is active in this, he notes, but adds: “At an industry level, there are questions about the scalability of this model – does it create more transparency and clients for end clients? It’s hard to say.”

The trouble for the industry is that it can reduce costs only if business becomes more scalable, and if industry trends push against this, that is inevitably a challenge, he says.

“As an example, let’s say we have a fund with 60% of its distribution in Continental Europe, 20% in APAC [Asia-Pacific] and 20% in the UK. If suddenly that single fund can’t be distributed across those three regions, I’ll need to create three smaller, sub-scale funds.

“So, by definition, those funds are less administratively scalable for the portfolio managers to manage and for the fund providers to administer. So that would reduce the ability to pass economies of scale back to clients.”
Is this an area that Efama should get involved in? “We have conversations with regulators where we highlight these issues. [But] it’s not something we should pick arguments about, unlike issues that would have been seriously damaging to our end clients, such as Priips. We take it in our stride.”

Last year, Efama argued successfully to European authorities that Priips – the Packaged Retail Investment and Insurance Products regulation – contained a flawed methodology for calculating transaction costs that would mislead investors.

Greco indicates a feeling that transaction costs, which are “arcane and broadly misunderstood”, are being overly emphasised amid the broader debate on fees. He says these costs for execution and settlement are already reflected in investment returns and that asking for transaction costs data – such as is the case under MiFID II – is like asking British Airways how much it spends on fuel.

“It’s already reflected in the price of the ticket, so who cares? If BA is paying too much for the cost of the fuel and is therefore non-competitive, consumers are going to fly on cheaper airlines because their ticket prices are too high. So, the benefit of these requirements is just not obvious and they have resulted in a lot of wheels spinning and incremental costs to doing business.”

The green light
From the arcane minutiae of transaction costs, up to the heights of investing for a better future. Greco responds to a point that JPMAM is not a name seen prominently, if at all, in the realm of environmental, social and governance (ESG) investing.

ESG is a topic that in the past two years has lit up asset management with a green light, making the industry more relevant than ever to institutions (that are increasingly required to implement its methods) and to Europe’s millennials, who will want to invest responsibly (once they’ve cashed in their bank accounts).

Funds Europe puts it to Greco that for all its size and influence, JPMAM’s not a name normally associated with ESG. “We focus more on the substance than the speed,” he replies.

“ESG is important. We want to take it seriously and get it right.

“The risk of ‘greenwashing’ is real and significant. ESG is not a marketing exercise for us.”

©2019 funds europe



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