[soft, gentle music]
Richard Madigan: I'm Richard Madigan, the Chief Investment Officer of J.P.Morgan's Private Bank, and I want to share with you today how we manage our clients' wealth. We ground our investment philosophy on four anchor pillars. The first and probably the most important is being a long-term investor. The trick really to long-term investing is to stay invested, holding through those cycles over a longer period generates constructive and positive returns. The second pillar is tactical flexibility, and that's taking a long-term strategic view and then overlaying how to navigate a macro cycle, a geopolitical headline, and where we see the smartest risk and mix of risk in a portfolio. It's not timing a market, it's navigating an investment cycle, and there's a critical difference between the two. The third pillar is specialization, and we've made a significant shift on my team, not only in terms of bringing specialists in by asset class, but multi-asset class portfolio managers. I think the industry is getting this wrong in still anchoring around a generalist role. The world's a great deal more complicated. I think the challenge is investing and the opportunities are demanding a degree of specialization that we really haven't seen in a generation. The fourth pillar is an asymmetric approach to risk, and in simple terms that really means focusing much more on trying to capture more of the upside in the market when it's going up and less of the downside in the market when it's going down. The critical path to doing that is making sure that we're getting the right strategic asset allocation so that diversification can help and play its part, and I think much more importantly making sure that we compound that difference over the investment horizon of being a long-term investor.
[calm, soothing music]
I want to focus on the CIO team. We work with 100 investment professionals globally. We very much focus on an institutional approach to money management. And we made a tremendous shift into specialization and specialists. We've added asset class portfolio managers over the last year to year-and-a-half on my team as the complexity of what happens within a unique asset class becomes so much more important in driving not only the outcome of returns but how we take risk. Asset class portfolio managers help me analyze the opportunities within each asset class, so there's a lot of rigor and depth in terms of how we identify opportunities and try to identify things that make the most sense to be in a portfolio, and also not to be in a portfolio. My multi-asset class portfolio management team can help me take each of those individual ideas at an asset-class level and determine how it fits into a portfolio, not only in terms of how we right-size it, but how we actually implement that yield. The other critical piece is focusing on portfolio analytics, portfolio construction, quantitative risk management. That's the anchor or the pillar to everything we do. We're able to size risks in portfolios and actually stress test those portfolios as well. Another critical team that we work with is our manager selection and due diligence teams. That's crucial because not all investment vehicles are created equally, whether that's an active manager or whether that's a passive strategy. Having a dedicated group of people who can understand not only how those managers generate returns with consistency, but also help negotiate the fees, so we're paying the least possible with regard to implementation costs really is something that I'm path dependent on and my team is. The managed solutions part of our business is really focused on innovation and that involves portfolio specialists that help us drive not only innovation but also communication. That way, my CIO team is focused full-time on managing your money.
[calm music]
Suzanne Wuebben: When we construct an investment portfolio, there are three key building blocks that serve as the foundation. Growth, Stability and Diversification. Each serves a different role. We'd all like to grow the value of our assets, and we do this primarily through equity exposure. But while equities have the greatest potential to grow your assets, they also come with greater uncertainty and risk. To balance the higher growth potential and higher volatility of equities, we employ high-quality fixed income and cash to provide lower volatility and a more consistent income stream. This adds some stability to portfolios to help minimize significant drawdowns and to help keep you invested through the cycles. While many investors can build well-diversified portfolios with simply cash, stocks, and bonds, we don't stop there. Hedge funds and liquid alternatives are an additional element of diversification. This gives the portfolio exposure to more opportunistic strategies and often lower volatility. It's another tool to use without being fully exposed to the risks in the market, therefore theoretically improving portfolio efficiency. We believe a well-diversified portfolio built for the long term needs all three components. When creating a strategic plan to appropriately allocate these components for each individual investor, your risk tolerance, time horizon, spending and liquidity needs, and other facts specific to you must be considered. Additionally, we need assumptions about what markets may do over the long term. Together with J.P.Morgan Asset Management, we create long-term, forward-looking assumptions for over 50 asset classes in multiple currencies. These include estimates for return, volatility, and correlation, which is a measure of the degree in which two markets move relative to one another. We don't think historical returns are indicative of future returns, so we use a different approach to create these forward-looking views. They are estimates of how the asset class will evolve over time and are independent as to how you choose to gain access to that asset class. All of this work culminates into the foundation of each of the portfolios that we manage for our clients.
[energetic music]
Jeff Gaffney: With the strategic allocation as the key reference point for long-term asset allocation and risk, our team evaluates the current market environment for investment opportunities across the shorter time horizon, which we expect to enhance the ability of our portfolios to deliver on client objectives. The first, and most essential question that we need to answer, is how much risk we wish to take relative to the risk budget that we have laid out for the portfolios. Michael Gray: If we see signs of a slowdown in economic activity, deterioration in corporate earnings or negative trends in leverage or defaults that markets have not fully discounted, we may look to reduce risk to protect capital and buffer client portfolios from potential volatility. Alternatively, if we see signs of improving growth, accelerating employment or investment levels, or more accommodative government policies, we may look to increase risk by targeting exposures that stand to benefit most. Once we establish the short-term outlook, my team and I use it to assess opportunities and risks across the global fixed income market. We perform comprehensive analysis of these opportunities, formalize recommendations and engage Jeff and the multi-asset portfolio management team to explore how they may fit into the overall portfolio. Jeff Gaffney: Once Michael and the fixed income team make a recommendation we work closely with them and the other asset class teams to examine each opportunity available to us and to understand their potential contribution to portfolio risk and return. Do they improve the return potential of the overall portfolio? Would they add or reduce our aggregate risk taking? Do we expect them to provide enhanced diversification to economic and market exposures? We perform extensive scenario analysis to test how the exposure may behave under various economic and market conditions beyond our base case expectations. We complete the process by selecting how to most thoughtfully and efficiently implement these within each portfolio. [soothing music] Richard Madigan: We use the phrase a 'disciplined investment approach' and I actually want to put some context around what we mean in that discipline. I think first and foremost it's anchoring around your goals as the starting point; that's the strategic asset allocation discussion and really for me the North Star in making sure that we get the portfolio construct right, not only with regard to your return expectations, but also the amount of risk you're comfortable with. Next comes the tactical flexibility in a portfolio and quite honestly how I feel about the world around us, and how we put apart a risk budget. That's help not only in terms of the macro landscape and what we're seeing in markets, but valuations, central bank policy, and even geopolitics. I rely heavily on our asset class portfolio managers to help me analyze the opportunities within an asset class. That can mean things that we like and want to overweight; things that we want to avoid, either because of valuation or because we think something can do better in contributing return and risk to a portfolio. The multi-asset class portfolio managers help me determine how those ideas within an asset class fit into a portfolio and also determine how much we want across equities, across fixed income, and also across alternatives. Our portfolio analytics, portfolio construction, and quant and risk teams help me analyze the risk characteristics in our portfolios. That starts with strategic asset allocation, but it also includes what we're doing tactically in a portfolio. In the investment committee at the end of the day, the decision of what goes into a portfolio or doesn't is mine, but I can tell you I've been smart enough to surround myself with a lot of very smart people who create a very healthy debate in terms of getting to the right investment decisions for each of our portfolios.
[upbeat music]
Nancy Rooney: While we know financial markets go up over time, we also know it's not a straight line. And so, designing a portfolio with the level of risk that feels manageable is paramount to our process so that clients have the confidence and conviction to stay invested when markets go down as they inevitably do during any cycle. Our highest conviction idea at the end of the day is that markets go up over time. But time is that key word. And so, understanding the time frame over which a client is investing is a key ingredient for us in choosing that right mix of assets. While volatility or risk is inherent in any financial market, that volatility is really greatest over short periods of time. The confidence to stay invested over the long term can really be the difference between reaching your financial goals or not. Once we've decided on the right risk level in a portfolio, we then have the ability to customize the allocation further as we incorporate a client's preference. There are essentially four different decisions that we can make together to create a portfolio that's customized for each client. First, we have the opportunity to choose between two sets of portfolios: the first set is based upon the overall returns of the market. And the objective of these portfolios is to outperform an agreed upon mix of assets over time. We'll be active in the way that we manage those portfolios - and will make changes to the allocation throughout the year as our CIO team sees opportunities to overweight and underweight certain markets and asset classes around the world. Together with our clients, we will establish an appropriate benchmark - which effectively just acts as a point of reference - to evaluate our performance over time. And for those clients who seek a portfolio with a lower degree of volatility - where consistency of return is of prime importance to them - we've designed a portfolio that's less reliant upon market returns. The decision on where to invest a portfolio is an important one. We manage portfolios that are invested across the globe as well as portfolios that are more regionally focused - like in the US and in Europe- for those clients who simply feel more comfortable having the bulk of their assets invested in their home market. Our recommendation lies in being global. We want to essentially capitalize on the fact that markets go through periods of expansion and contraction at different rates and at different times. And so, being global gives us the full flexibility to navigate that broader opportunity set. In choosing how to implement almost any type of portfolio, we have the ability to use both active and passive managers. In fact, as the passive market has continued to evolve and deepen, we've shifted a considerable portion of our equity exposure to passive and passive factors- which means meaningfully lower costs. For those clients who prefer to focus on passive solutions, we have the ability to build portfolios using primarily passive type of instruments. Our recommendation is to use both. By combining active and passive strategies together, I'm able to get precise exposure to efficient markets in a cost effective way while also being able to use active managers in less efficient markets where they have the greater opportunity to add value. In any portfolio that we build, we also have a choice on whether we want to include alternatives. And in this context, alternatives can be vehicles such as Hedge Funds as well as Liquid Alternatives. While Hedge Funds can bring some restrictions on liquidity, we look to Hedge Funds and Liquid Alternatives as important tools that can help us get access to markets that just are not as easily reached by traditional stock/bond managers - which also allows us to increase the level of diversification in a portfolio. Designing a portfolio for a client is a process that's unique to each person. As we consider their financial objectives as well as their tolerance for risk, we also aim to provide some level of choice. And choice to me is the ability to express preference within a circle of good advice which is our hallmark. And so, we look forward to working with you to build the portfolio that is right for you and your families to reach your financial goals.
[lively music]
Jeff Gaffney: One way to illustrate our investment process is to walk through an actual example of an allocation change that we executed in portfolios. As we entered 2016, the global landscape reflected an environment of heightened economic uncertainty. GDP growth was decelerating across both developed and emerging markets. Commodity prices were continuing to plummet. And both equity and credit markets were reflecting increasingly divergent views of the business cycle conditions as well as corporate default risk. We have been monitoring these trends closely. And as part of our on-going assessment of the near term environment, the team evaluated the risks to global growth and the chances of recession. We engaged our Asset Class teams and Alternatives, Equities and Fixed Income, to produce a comprehensive view with respect to our outlook and investment strategy for this environment. The goal of the exercise was to use our investment conclusions, to stress test our existing portfolio positioning, and identify ways to reduce risk efficiently. Michael Gray: We leveraged our team's expertise, as well as the full complement of resources available across the firm, and externally, to challenge our outlook for growth in key economies. Including China, the US, and across the Euro zone. After extensive analysis and debate, we concluded that the slow-down in growth, while meaningful, was transitory. And that in our view, the risk of global recession, remained relatively low. Once we reaffirmed our short-term outlook, we examined conditions and valuations within each asset class. Global fixed income markets had priced in a much higher risk of recession than either equities or alternatives. Particularly in the corporate bond market, where spreads had widened dramatically and now implied a sharp spike in defaults over the next twelve months. While a large portion of this repricing was justified by the drop in commodity prices, our analysis indicated that credit valuations were reflecting a more negative outlook than even our most pessimistic estimates. This was true across both developed and developing markets. But US investment grade and high yield actually had dislocated the most. We completed our analysis in mid-February, shared and debated our conclusions, and determined it was an opportunity to add both an investment grade credit and high yield exposure to portfolios at highly attractive valuations. Jeff Gaffney: Together with the input, received from our partners across other asset class teams, we made a few decisions. The upside for high yield in particular, looked attractive, even in the context of potential equity market returns. So we decided to bring down our exposure to equities alongside our addition to high yield. The net result was a reduction in the amount of risk that we were taking across portfolios. Without a reduction in our expected returns. Positions were sized according to both the opportunity on offer in the credit markets, and the risk reduction that we sought to achieve in the trade. Finally, the implementation was thoughtfully executed through high conviction managers, which had extensive experience in credit markets, and who believed could successfully navigate those markets, applying such levers as sector exposure, and securities selection, to the benefit of our clients.
