Take control to capitalize on changing marketsContributor Jeffrey Geller
With returns expected to be lower, Jeff Geller, Chief Investment Officer for Multi-Asset Solutions at J.P. Morgan Asset Management and portfolio manager for JPMorgan Global Allocation Fund, explains how a global multi-asset investment approach with the flexibility to benefit from different markets and macro environments can help investors maximize total returns, while also minimizing downside risk.
Make events your friend, not your enemy
Markets are driven by events. In just the last five years, investors have faced a full blown European debt crisis, a sharp slowdown in Chinese growth, the taper tantrum, a collapse in oil prices, the onset of negative bond yields in Japan and Europe, and—most recently—the Brexit vote in the UK.
These events cause uncertainty, but also opportunity. There’s growth to be found even in the toughest market conditions, you just need to know where to look—and ensure you have the flexibility to take full advantage across multiple regions and asset classes.
Be flexible with your core
The eurozone debt crisis of 2012 and the taper tantrum of 2013 provide a great backdrop to illustrate how this flexibility can work in practice. In 2012, we increased our bond exposure as high as 75%, as eurozone debt concerns pushed investors into the safety of core government bonds and created value in parts of the high yield market. We then changed course, pushing our equity exposure up to nearly 80% in 2013 as stocks benefited from the sell-off in Treasuries during the taper tantrum.
When you have a flexible total return approach, it’s not just what you own that drives returns, but what you don’t. Last year, we reduced emerging market equities to zero as expectations for higher U.S. interest rates hit the asset class. We’ve since brought exposure back up close to neutral (6%) as the dollar has weakened and sentiment toward emerging markets has improved.
Manage currency exposure to boost returns
Currency is a real differentiator in the global multi-asset space. Many managers see currency exposure as an unintended risk in portfolios, but we think currency should be treated as an active decision driven by insight—you either keep currency risk if you think it will contribute to total returns, or you hedge the risk away if you think it won’t.
This active approach to currency risk has allowed us to capitalize on some dramatic moves in the currency markets over the last year or so. In 2015, our euro exposure was mostly fully hedged as widening interest rate differentials drove the dollar sharply higher. More recently, we moved to hedge our sterling exposure going into the Brexit vote, but we have left our yen exposure unhedged to benefit from the Japanese currency’s safe haven quality this year.
There’s growth to be found when you know where to look.
With access to the entirety of J.P. Morgan’s global investment platform, the Fund searches worldwide to maximize total return, while also managing risk.
RISKS ASSOCIATED WITH INVESTING IN THE FUND
The Fund's fixed income securities are subject to interest rate risk. If rates increase, the value of the Fund's investments generally declines. Under normal circumstances, the Fund will invest at least 80% of its Assets in bonds. The Fund may invest in securities that are below investment grade (i.e., "high yield" or "junk bonds") that are generally rated in the fifth or lower rating categories of Standard & Poor's and Moody's Investors Service. Although these securities tend to provide higher yields than higher-rated securities, there is a greater risk that the Fund's share price will decline.
International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Also, some overseas markets may not be as politically and economically stable as the United States and other nations. The risks associated with foreign securities are magnified in countries in "emerging markets." These countries may have relatively unstable governments and less-established market economies than developed countries. Emerging markets may face greater social, economic, regulatory and political uncertainties. These risks make emerging market securities more volatile and less liquid than securities issued in more developed countries. Under normal circumstances, the Fund will invest at least 40% of its total assets in countries other than the United States.
The Fund may invest in futures contracts, options, swaps, forwards and other derivatives. Many derivatives create leverage thereby causing the Fund to be more volatile than it would be if it had not used derivatives. Derivatives may be more sensitive to changes in economic and market conditions and could result in losses that significantly exceed the Fund's original investment.