Massimo Greco at JP Morgan AM outlines key selector trends in wake of ECB announcement
Massimo Greco, head of European Funds at JP Morgan Asset Management, sees an ongoing need for flexibility in the relationship with fund selectors, in light of the changing nature of the market environment in which they work.
The ECB recently announced some eye catching policy moves to try to boost the eurozone economy. What do you think are the implications for fund selectors and for investors?
Markets had a checklist for the ECB and for the most part that was delivered, from the rate cut to targeted LTRO to asset backed securities purchases. All these amounted to a strong message that the ECB is serious about steering the eurozone economy away from the edge of deflation towards an inflation level more consistent with their medium term 2% target. We think it was a well-bundled, relatively comprehensive set of policies, but their work is not done. Inflation is expected to rise to only 1.5% by the end of 2016. Therefore, investors can be sure that the ECB will remain highly supportive even after the US Federal Reserve ends Quantitative Easing and advances on its path towards further tightening.
The ECB’s reduction in deposit rate to negative, challenging the notion of the ‘zero bound’ below which rates had never gone, puts a renewed urgency on income seeking investors, so I think we’ll see that continue as a constant theme.
I think another implication of the ECB will be that discussion over what to do about fixed income will remain top of mind for investors. The frequent question we get is how to evolve fixed income portfolios to match the current environment. I think we’re gradually reaching a form of consensus amongst fund selectors that the future will be fixed income strategies that are more tactical, flexible and outcome-oriented.
In general the ECB’s moves ensure that this low growth, low inflation, high liquidity environment persists in the markets and we think that means continued support for risky assets. When we look at areas of value in the market, our fixed income managers think higher yielding European fixed income assets still look attractive. Their highest conviction areas continue to be in the periphery bond markets, such as Spanish and Italian bonds, and European high yield bonds.
Recent fund flow data suggest strong demand for multi-asset products. What is driving the European investor appetite for these products?
Clearly it’s about longevity and the need for returns and income. Across Europe investors are starting to wake up the reality that decent returns on ‘safe haven’ assets aren’t coming back anytime soon. The ECB’s move was just the latest piece of evidence that interest rates aren’t going to budge for years. So there is a recognition that you have to diversify and you have to get invested in order to harvest some returns, but most investors don’t know how to get started. What combination is the right return for the right amount of risk – that’s a fundamentally difficult question to answer and even more difficult to act upon. That’s the appeal of multi-asset solutions products for investors; they take on the asset allocation decision.
One aspect of most of these multi-asset products is that they do the asset allocation for the investor. Isn’t that supposed to be fund selectors jobs?
Well, yes and no. It is true that fund selectors will always seek what we call ‘building block’ products. These are the funds the represent the best exposure to a certain area of the market or a certain asset class. For example, high yield bonds or US growth stocks. There will always be a competitive market for the most successful funds in these building block areas where fund selectors pick and choose the best options to build an integrated portfolio.
That is not going away, but clearly there is an appetite even on the part of the fund selectors to utilize investment solution products. Determining the right asset allocation for a shifting global opportunity set is a challenge in a low-growth, low inflation environment. Choosing the right trade-off between risk and return can be an important value-add for a multi-asset manager. For example, one of our flagship multi-asset products has an income mandate and the managers are constantly questioning where they can harvest the most attractive yield at the least possible risk. As investors increasingly look for steady sources of sustainable income for their portfolios, we think multi-asset solutions products have a place in the fund selector toolkit.