JPMorgan’s active ETF push

Why JPMAM is betting on active ETFs

The hot areas in asset management right now are crypto and passive investment. At an event in London last week, JPMorgan Asset Management‘s chief executive George Gatch explained why he’s not touching either of them, writes our columnist Katie Martin. 

JPMAM is, as Gatch stressed at several points, an exclusively active investment house, with $3.1tn in assets under management. But that does not mean it ignores exchange traded funds. Far from it. 

JPMAM is bringing aboard ETF veteran Jon Maier (formerly chief investment officer of Global X) who starts today as chief ETF strategist and will lead a new division dubbed ETF Insights. 

Gatch outlined some punchy targets. Right now it manages about $160bn through 100 (active) ETFs, a number it wants to increase to $1tn within five years. “This is one of the most fundamental changes in the asset management market,” he said, noting that mutual funds shed about $800bn in assets last year, and ETFs — not coincidentally — gained . . . $800bn. Active ETFs may account for only up to around 7 per cent of assets in ETFs, he said, but about a fifth of the inflows. 

ETFs have been all the rage among US investors, amassing about $2tn in net new dollars from 2021 to the end of 2023, according to data from Morningstar. Investors have withdrawn about $1tn from mutual funds in that time.

Fixed income is also a particular area of focus for JPMAM. Active management beats passive in fixed income, hands down, said Gatch. But active fixed income ETFs have a place, and the US group is looking to have around 30 fixed income ETFs out in the market by the end of this year.

He is clearly not, however, looking to join the likes of BlackRock in launching crypto ETFs. (Earlier this month the bitcoin rally pushed BlackRock’s new bitcoin ETF over $10bn in record time.) Gatch said he can’t figure out a way to value these tokens as part of a long-term portfolio. “We don’t have one, so therefore we’re not launching a product of that type.” 

European fund group warns of ‘systemic’ risk from US settlement reform

Asset managers are slowly waking up to the full implications of a move by the US and Canada to shorten settlement times for stocks, bonds and exchange traded funds, writes Mary McDougall in London European institutions held more than $11tn of US equities and debt last year, according to the Federal Reserve. 

The US will shorten the window, when deals are matched and legally transferred from sellers to buyers, to reduce the amount of capital tied up until trades are finalised. The shorter settlement timeframe is known in industry jargon as T+1. 

The US’s shift is likely to throw interlinking markets, such as foreign exchange, shares and cross-border ETFs, out of synchronisation. Custodians and asset managers have relied on having at least one full working day to iron out operational issues, from finding the money or the assets, resolving mismatches or overcoming local IT issues.

Last week the European Fund and Asset Management Association warned that the looming changes to the time it takes to settle trades on Wall Street pose a “systemic” risk to currency markets. 

The industry body said that around 40 per cent of daily foreign exchange deals would be shut out of the main platform for reconciling currency trades when the US moves from two-day to one-day settlement in May. That total could rise to “hundreds of billions” on volatile days, it added. 

The group, which represents the €28.5tn European investment industry, has asked major central banks, which jointly own the CLS currency settlement service, to implement urgent measures to address the risks. “Putting $50bn to $70bn or greater at risk, on a daily basis, in the world’s major currencies should be a significant concern,” warned Efama in a paper published on Thursday. “This is of systemic importance.”

T+1 has been much discussed among traders and technology people, but has not yet apparently received much attention from the top executives in most asset owners and asset managers, argues Jim McCaughan, the former chief executive of US-based Principal Asset Management. 

Is the asset management industry ready for T+1? Email me: harriet.agnew@ft.com

Chart of the week

A closely watched gauge of stock market sentiment has hit its most extreme level since 2008, as options traders increasingly focus on capturing further gains in soaring indices rather than worrying about a potential sell-off.

An almost 25 per cent rise for Wall Street’s benchmark S&P 500 index since the start of November has wrongfooted traders who had expected high interest rates to trigger a recession, writes George Steer in London.

Many are now snapping up options tied to the S&P that profit if the market keeps on rising. At the same time, the strength of the rally, which has come in spite of higher than forecast inflation in January and February, has meant that investors have largely opted against purchasing options that protect them against market falls.

Options are a type of derivative that confer the right but not the obligation to buy an underlying asset at a certain price — a call — or sell an asset at a pre-agreed price — a put.

Usually calls are cheaper to purchase than puts, reflecting investors’ typical preference for buying stocks and then hedging their portfolio with puts.

However, puts that guard against less than 10 per cent index declines have become so cheap off the back of the US market’s barnstorming rally that the two-month so-called skew — a measure of the difference between the implied volatility of puts relative to calls — for both the S&P and the tech-heavy Nasdaq Composite has fallen to the lowest levels in 16 years, according to Bloomberg data gathered by UBS. Implied volatility reflects the market’s forecast of moves in a security’s price over a fixed period of time.

“There’s been a lot of Fear of Missing Out, partly because it’s been a very strong rally, so the hedge for a lot of people is to make sure they’ve covered that upside,” said Gerry Fowler, an equities and derivatives strategist at UBS.

“No one is really worried about small downturns, so no one is bothering to buy the puts,” he added. Read the full story here

Five unmissable stories this week

The board of Baillie Gifford’s flagship £14bn Scottish Mortgage Investment Trust has announced a £1bn share buyback in an attempt to prop up its share price, which is trading at a 13 per cent discount to its net asset value. The trust invests in high-growth companies such as Nvidia and Tesla. Tom Slater, the trust’s manager, said: “The stock market has yet to fully recognise their progress, which creates the opportunity for us to buy the portfolio for less than its market value.”

US institutions with private fund investments in China are struggling to exit what were once among their most successful bets as the regulatory environment tightens and geopolitical tensions mount. Four public pension plans with more than $4bn allocated to China-focused private equity funds told the Financial Times they were ready to delay redemptions from investments nearing the end of 10-year lifespans. 

Liontrust chief executive John Ions has recently approached its smaller London-based rival Artemis Investment Management about a potential takeover and the two parties held early stage discussions. But successfully combining fund management businesses is notoriously difficult and Liontrust’s own mixed record of acquisitions (seven in the past 12 years) illustrates how dealmaking is neither a panacea to the industry’s challenges nor an assured catalyst for growth. Ions looks like “Martin Gilbert minor,” argues Lex.

Sir John Armitt, chair of the National Infrastructure Commission, has hit out at a drive to push pension schemes to invest more in Britain, saying there is “no reason” funds should have a home bias. The UK government’s top infrastructure adviser said tens of billions of pounds were needed from the private sector to meet infrastructure needs, including energy upgrades, new hospitals and roads. But he added that it would not be right for pension funds to simply invest in home markets due to ministerial pressure. 

Smith & Nephew wants to increase pay for its US executives to bring it closer to American levels, with Rupert Soames, the chair of the FTSE 100 medical devices company calling UK pay packages “not sustainable”. The move marks the latest signal that big UK-listed companies with a large proportion of overseas revenues will try to challenge shareholder reluctance to approve higher pay in this year’s AGM season. 

And finally

With a new show of his Frank Auerbach: The Charcoal Heads at the Courtauld Gallery in London, the painter tells our chief art critic Jackie Wullschläger why, at 92, he is more than ever acutely aware of the Old Masters.

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