On the offensive and the defensive

JP Morgan Asset Management launched its five-strong JPM Fusion fund-of-funds range in March. Here Jamie Farquhar, head of sales for J.P. Morgan Adviser Solutions, tells Julian Marr it is not necessarily the time you arrive at a party but what you bring to it that counts

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Why leave it to 2013 to launch a fund-of-funds range?

It could look as if we are slightly late to the party – particularly given the ever-increasing propensity to outsource – but RDR has certainly been a catalyst to increasing the rate of outsourcing. J.P. Morgan Asset Management has traditionally run single-strategy and multi-asset funds for financial advisers but advisers are increasingly buying packaged ‘one-stop-shop’ products, like a model portfolio or a fund of funds.

Effectively we are seeing a swing in the marketplace from ‘traditional’ retail to wholesale, with probably fewer than 100 major decision-makers responsible for huge flows in and out of funds. This greater volatility of fund flows means greater volatility of revenue streams, which makes it far more difficult to manage your business.

We needed to find a solution here and, obviously enough, that has been to move into the area causing the disturbance – in other words, to launch a range of products that provide a solution to advisers’ outsourcing needs and that are ‘stickier’ in nature. The JPM Fusion range provides us with both an offensive and a defensive answer to what is happening post-RDR.

What have been the immediate effects of RDR in terms of investment outsourcing?

RDR has been the catalyst for change in two ways. The ‘professionalisation’ of advisers – demonstrating abilities through qualification – is one and the other is the drive by the regulator to remove commission bias from product selection. This has meant advisers moving to a fee-based business model and therefore focusing on defining what their service is to different areas of their client base.

At the same time, the 15 or 20 major nationals and networks that control a huge swathe of UK distribution have looked very carefully at what has come out of RDR and at the way they have been running their businesses in the past and they have identified three opportunities – to create a better service for clients, greater operational efficiency within their own businesses and a greater degree of risk reduction.

What does that mean at a fund level?

In the past, if advisers selected individual funds, there could be a significant degree of risk. If that choice is narrowed down – albeit within a whole-of-market, open-architecture environment – to a core range of products and services that have been through a deep process of either internal or external due-diligence, then you are moving towards what the industry is branding the Centralised Investment Proposition.

If you have those 15 or 20 major distributors all moving towards a CIP and if a sensible CIP has a shortlist of half a dozen providers offering a core investment proposition on an outsourced basis, the industry is going to tighten up. That is what is going to drive distribution on the retail side of the investment industry.

The wholesale sector will grow rapidly but the successful providers in that space will be those offering top-notch service and sensible pricing across a differentiated product range. The fascinating aspect will be that last part because the investment industry is being narrowed down again and again towards a pretty commoditised marketplace with little differentiation.

How can fund groups stand out in such a market?

If, as an adviser, you are going to use a CIP, you want an assured, efficient and cost-effective mechanical process to ensure you are not only meeting your clients’ needs and aspirations absolutely but also recording an audit trail of the decision-making process that gets you there.

The chosen route of many advisers to defining suitability is to work in conjunction with asset risk consultancies. As such, any product range designed to meet advisers’ needs has to fit in with the asset risk consultants in terms of establishing risk so an attitude-to-risk tool can select one of the products and define that audit trail of suitability.

With advisers creating different segments of clients, we need to provide solutions that meet each of those segments’ needs. The JPM Fusion range corresponds to the risk grades from three to seven across well-known risk-rating agencies.

Do you see any drawbacks to using risk-rating services for portfolios?

The interesting point about adhering to this whole framework is the asset risk consultancies’ analysis is based on volatility, which is obviously backward-looking. But the investment process also has to be forward-looking – to account for asset allocation and a view as to where your portfolio is moving in the future. So what does that do to a particular risk grade?

If you look at all the funds of funds with a risk grade of five, for example, you will find the spread of performance over three years, from top to bottom, is tiny. Those funds all have roughly the same asset allocation and roughly the same charges and they mainly select from the same universe of funds in the UK so it is not surprising to find remarkably similar performance.

How can fund groups address that?

The only way managers can strike a difference is on fund selection and the JPM Fusion range has the advantage of access to the exclusive buy-list of J.P. Morgan’s 40-strong Global Manager Selection team, who are analysing and performing due-diligence on funds all over the world. So Tony Lanning, who joined as lead manager of the JPM Fusion funds in May, has all that resource at his fingertips as he orchestrates the range’s top-down asset allocation and bottom-up fund selection.

Additionally, even with all that due-diligence and the universe of open-ended funds we have available to us globally, there are still times when we cannot find the exposure we want. In such cases we can very often work with a third party to create that exposure.

Could you give a specific example?

US investment house Double Line has a fabulous track record of investing in mortgage-backed securities but, as its fund is only available in the US, we introduced the group to Nordea and so brokered the launch of a new Double Line-run European fund to which our fund selection team could gain access.

This ability to ask specialist fund managers to create a European share class we can purchase for our portfolios has given us powerful exposure to asset classes and funds that may not be ordinarily available to other fund management houses.

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Julian Marr is editorial director of Adviser-Hub