J.P. Morgan Asset Management’s recently divulged plans to trim some 100 active mutual funds have raised speculation that cost- or job-cutting could be its motivation. Given the public comeuppance its parent company has received from regulators on both sides of the Atlantic, belt tightening would seem in order in light of the bank’s skyrocketing legal bills for its pending litigation, including JPMorgan Chase & Co.’s alleged role in LIBOR manipulation, and fines and settlements for resolved cases, such as the London Whale trading scandal.
But despite the company’s plans to cut 17,000 jobs by the end of next year, it does not expect to trim any positions in the course of what the company is calling “a fund review and rationalization process”: a sorting out of less popular funds between the U.K. and the rest of Europe, the U.S. and Asia, according to a spokeswoman. The process, already under way in the U.K. and Europe, involves rolling some funds into existing products and closing others.
J.P. Morgan Asset Management has not given a dollar figure for the affected assets under management, leading to speculation that the funds in question do not hold sufficient assets to justify continuing on their own. “The funds probably are small, and this amounts to a pruning of the pipeline,” says Todd Rosenbluth, director of ETF and mutual fund research for S&P Capital IQ. “There just isn’t enough information for me to connect the dots to the fund cuts,” he says about J.P. Morgan’s balance sheet.
J.P. Morgan Asset Management has started with 42 active U.K. and Europe debt, equity and commodity funds, liquidating or merging them with its other funds in the region. The process is set to continue through early 2014, when an additional 58 active funds in the U.S. and Asia are due to come under review. The company has not named any of the latter funds but has issued a list of the U.K. and Europe funds that maps out which are being liquidated or merged.
The spokeswoman denied any link between closing the active mutual funds and J.P. Morgan Asset Management’s aspirations to offer actively managed ETFs, a plan that was put on hold shortly after the company filed in 2010 for exemptive relief from the Securities and Exchange Commission to issue an actively managed equity ETF. That same year, the SEC suspended issuers’ rights to use derivatives in active ETFs. The SEC lifted the ban this past December.
There would be an immediate advantage in going to active ETFs from a global standpoint, according to Rosenbluth, in that, unlike mutual funds, ETFs are not restricted to sale in the country in which the fund is domiciled. J.P. Morgan Asset Management insists the active ETF undertakings are a natural extension of its active mutual funds and not a replacement for them.
In turning toward active ETFs, J.P. Morgan Asset Management will be aligning with its peers, asset managers that are poised to do the same. Until January 2013 there were just 55 actively managed ETFs, according to Robert Goldsborough, an ETF analyst at Morningstar. Under Morningstar’s classification system, which considers active any ETF without a benchmark or not seeking to replicate an index, only ten have been added since January for a total of 65 active ETFs of which, according to Goldsborough, the lion’s share of the present active ETF offerings are made up of alternative investment funds or very small firms.
Baltimore-based T. Rowe Price Associates confirmed via e-mail that it has secured approval to launch actively managed ETFs, should it so decide. Presently, Fidelity Investments has just one ETF of its own, the Nasdaq Composite Index Tracking Stock ETF, which, as of September 30 has more than $250 million in assets. The Boston–based firm got approval in May to offer debt and equity active ETFs and has filed registration statements for five active bond ETFs. And PricewaterhouseCoopers dubbed ETFs in a recent research paper the “next frontier products,” projecting the amount in active ETFs to blossom from its present $15 billion to $175 billion by 2018, if they can meet SEC standards of transparency — no small order, considering mutual fund portfolio managers are used to a 45-day window before they have to publicize their holdings.
“Fund executives are spooked by the notion of daily portfolio holding disclosures,” says Goldsborough. “The ETF wrapper is anathema to a large number of open-end actively managed funds, due to fears of front-running and shadowing.” Fund managers at least don’t have to worry about their jobs, says Goldsborough. The same portfolio skills required to actively manage mutual funds will still be needed to run active ETFs, whose expenses he expects will rise to reflect that level of expertise.
T. Rowe Price, noted sternly in its e-mail, “We will not introduce an ETF version of our traditional active mutual funds if the daily disclosure of portfolio holdings could be detrimental to existing shareholders.” And the firm may not have to. When the major banks have entered a potential market of this size in the past, successful work-arounds been known to materialize.
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