JPMorgan Doubles Model SMA, UMA Business in 2010
FundFire has an interesting article about the tremendous growth of JP Morgan’s managed account programs last year. The article, written by Tom Stabile, describes some of the key features that made JPM’s programs so successful. It also points out some new trends that are appearing in the industry.
Is their UMA open architecture or not? Here’s what the article says:
JPMorgan is the exclusive provider of SMAs to the fast-growing Chase UMA program, which combines SMAs, mutual funds and exchange-traded funds in a single custodial account. The UMA has an open architecture platform for mutual funds and ETFs, with product selection from a Chase due diligence team.
Well, since no outside SMA managers are available, it’s not really open architecture. But how important is this? It had no measurable effect on their ability to gather assets last year. Does this mean that open architecture isn’t important to clients?
Keeping SMA management in-house is certainly more profitable. Managers usually charge 30 bps for providing their models to a UMA. JPM can pocket this to boost profits or use it to lower their overall fees and undercut their competitors.
I’ve been hearing a lot about how models-only is the wave of the future and assets in manager-traded SMAs are disappearing fast. According to the article, JPM’s models-only programs added $1.6 bil in 2010 while their traditional SMA programs lost $0.4 bil.
The data underscores that models are an increasingly vital component for SMA manager business lines, says Jed Laskowitz, head of distribution for JPMorgan Funds Management, the retail arm that also runs the SMA business.
This same trend seems to be occurring around the industry. Three managers alone – Allianz Global Investors, Neuberger Berman and Lord, Abbett & Co. – transitioned more than $20 billion in assets to the model portfolio format in 2010, according to a report by Cerulli Associates.
Last week I spoke to Mike Everett, head of Business Development at MyVest. He said that he sees the market share of traditional SMA programs declining due to the increasing popularity of models-only. This trend will negatively impact technology vendors that rely on manager connectivity as their primary selling point. “In a models-only world, connectivity to managers doesn’t matter,” Mike noted.
The Most Interesting Part
This is the part where I’m quoted:
The Chase brokerage arm does appear to have an edge helping it outpace many competitors, says Craig Iskowitz, managing director of Ezra Group, a consultancy. One of those is being able to tap its asset management affiliate.
Another strength appears to be how Chase’s UMA already has a format many competitors are trying to establish – fully discretionary client relationships, which means advisors don’t have to check back with clients on every investment move, and a model that keeps most portfolio decision-making at the home office.
“It’s way more efficient to have it done in the home office,” Iskowitz says. “And if you have a good [investment] mix, it can be powerful because studies have shown that asset allocation is 80% of your return.” He says adding in a solid technology platform with robust rebalancing capabilities can greatly increase efficiencies for a brokerage operation.
I decided to fact-check myself and found that 80% is incorrect. The most commonly cited research (this one and this one) report that asset allocation makes up more than 90% of a portfolio’s return. Although, a recent article by Thomas M. Idzorek (published in Morningstar Advisor magazine) claims that “After removing the market movement, asset allocation and active management are equally important in explaining return variations.”
More Bad News for Bonds
Another instance of someone predicting that bonds will fall out of favor in 2011:
[Jed] Laskowitz says the SMA business overall may be set for a rebound this year, with signs that investors may tilt to equities.
I wrote about how some managers are predicting poor performance for bonds in a prior blog posting entitled, Why Bond Portfolios are a Flawed Retirement Strategy. Laskowitz believes that investors will re-evaluate their portfolio risk and look to increase their weight in equities, which naturally leads to more interest in SMAs.
MFA – The 600 lb Gorilla
While UMA is still the pretty girl in the room, Mutual Fund Advisory (MFA) continues to suck up assets at every sponsor and JPM is no exception:
Most of their focus is on the mutual fund business, where JPMorgan enjoyed significant inflows of $20.7 billion last year, placing second industry-wide, behind only PIMCO’s $64.1 billion, in new assets into actively managed long-term mutual funds and ETFs, per data from Strategic Insight.
What I’d like to see is a detailed comparison of the JPM UMA/SMA programs versus some of their competitors to try and identify where they have advantages that could be the drivers of their AUM growth.