Portfolio 2011: A compendium of investment perspectives from J.P. Morgan Asset Management

Feb 01, 2011

 
Research and publications

Portfolio 2011: A compendium of investment perspectives from J.P. Morgan Asset Management

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Portfolio 2011 brings together perspectives from CIOs and market strategists across J.P. Morgan Asset Management. A collection of 15 essays, Portfolio 2011 shares the firm’s insights on recent themes and unfolding trends affecting asset allocation, investment strategies and the financial markets.

Full Publication

Individual Essays


Questions
For further information contact your J.P. Morgan representative or email: jpmam.info@jpmorgan.com
Foreward (pdf)
We invite you now to read through these essays and hope the ideas you find there might furnish food for thought and a basis for our dialogue together in the year ahead. As always, we thank you for your trust and wish you all good fortune.
 

George C.W. Gatch

CEO, Investment Management Americas
 
Global Markets
Growing Apart, but Holding Together (pdf)
A description of the post‐crisis divergences that unfolded around the globe in 2010.The U.S. trudged along a sub‐par road to recovery; emerging markets rebounded with relative alacrity—arousing inflation fears—and the eurozone (with its own north/south divide) undertook a patchwork of policy initiatives to address the debt crisis on its periphery. These challenges will mark 2011 as well, perhaps with greater concern over higher inflation and rising interest rates. Yet, this report takes a cautiously optimistic view of the risks, anticipating high volatility but, ultimately, another up year for risk assets, moderate weakness for the U.S. dollar and solid returns in commodity markets.
 

Stu Schweitzer

Global Markets Strategist

 
U.S. Markets
Matters of Confidence (pdf)
This essay contends that many of the fundamentals for an economic rebound have fallen into place. Home ownership is more affordable than ever, relative to income, and interest rates are low. Business balance sheets are laden with cash and profitability has neared records. The missing ingredient is psychological. A lack of confidence, pervading livingrooms and board rooms alike, has afflicted the equity markets, as investors have opted for the relative safety of fixed income. The outlook could well shift away from bonds and toward stocks if, as seems likely to us, steady profits and increased hiring restore market morale.
 

David Kelly

Chief Market Strategist, J.P. Morgan Funds

 
Global Fixed Income
The Seven Year Workout (pdf)
This essay references our estimate for the time it will take U.S. consumers to dig their way out of the mountain of debt that culminated in the Crash of 2008. In a slowly mending economy, with inflation still a distant prospect despite the headlines, we expect a stable fixed income market this year. The sectors with the best prospects in this environment are high yield, benefiting from the economy’s uptick and accommodative interest rates, and emerging market debt, where much of the gains could come from currency appreciation.
 

Bob Michele

Global Chief Investment Officer
New York/London/Asia Fixed Income

 
Emerging Markets Debt
Coming of Age (pdf)
This essay traces the recent development of emerging market debt as a mature asset class. Coming out of the financial crisis, the emerging markets have maintained fiscally responsible policies while promoting both economic growth and price stability. With EM credit ratings on average investment grade today, we expect further upgrades as capital continues to flow toward emerging markets. The primary risks to this view relate to the potential for lagging recoveries in the U.S., further European peripheral stress and from rising inflation expectations.
 

Pierre-Yves Bareau

Head of Emerging Markets Debt

 
U.S. Fixed Income
Re REMICs: A New Lease on Life for MBS? (pdf)
This essay evaluates a structured security that has recently returned to the market. A variation on the re REMICs popular prior to the credit crunch, the new version bundles together the below‐investment grade portion of old MBS with high quality credits. Compared to the CDOs they have replaced, the new re REMICs carry less leverage and boast more stable structures. Recent questions on rating the securities have underscored the importance of independent analysis, but we believe sophisticated and disciplined investors can realize attractive value and capture superior total return in these instruments.
 

Gary J. Madich

Global Chief Investment Officer
Columbus Fixed Income

 
Municipal Bonds
Volatility and Uncertainty Yield Investment Opportunities (pdf)
This essay looks behind the headlines to assess the state of the municipal bonds. Periods of supply/demand imbalance as well as ongoing credit concerns will likely cause continued volatility in the municipal market. Most of the sector’s defaults have occurred in the riskier corners of the market, however, and higher quality bonds remain solid credits. States and established municipalities rely on the credit markets for funding and possess the taxing power and legal authority to meet their obligations. That adds up to a favorable risk/reward profile for investors willing to challenge the prevailing negative sentiment.
 

Priscilla C. Hancock

Municipal Strategist

 
Global Liquidity
Trapped Cash: Local Market Challenges (pdf)
This essay reports on the large amounts of cash building up in U.S. corporations’ offshore operations. Because of local market restrictions and home market tax policies, this growing mountain of liquidity risks becoming, in effect, a frozen asset, unavailable to fund a corporation’s global strategy. While developments on world currency exchanges, particularly the globalization of China’s renminbi, promise a long‐term fix, the article recommends the adoption of an explicit and proactive global liquidity investment policy to avoid the consequences of "trapped cash."
 

Robert Deutsch

Head of the Global Liquidity

 
U.S. Equity
Shining through the Macroeconomic Gloom (pdf)
This essay makes the case the U.S. stock market should generate reasonable returns once again in 2011. Corporate balance sheets are in excellent shape, buttressed by formidable amounts of cash. Corporations themselves have come through the recession “lean and mean,” and the resulting operating leverage has produced near‐record earnings. Despite such encouraging signs, investors have stayed largely on the sidelines, leaving valuations with some room to run. Still, the environment is not without challenges. Problems in funding peripheral euro debt, stubbornly high fiscal deficits or unexpectedly sluggish economic growth could all upset the constructive scenario.
 

Paul Quinsee

Chief Investment Officer,
U.S. Large Cap Core and Value

 
Emerging Markets Equity
Maintaining the Growth Advantage (pdf)
This essay offers our outlook for emerging market equities in the year ahead. Driven by the fiscal prudence that saw them through the global recession, burgeoning intra‐EM trade and a rapidly expanding middle class, the emerging markets have traveled farther down the road to economic recovery as compared to the developed world. Their macroeconomic risks now, with relatively strong growth, skew decidedly toward inflation. Our team looks through the challenges to find EMs with sound fundamentals, reasonable valuations and headroom for solid gains.
 

George Iwanicki

Emerging Markets Macro Strategist

 
Private Equity
Getting Past the White Knuckle Years (pdf)
This essay describes private equity’s situation at the outset of 2011. General partners come into the year with leaner companies, positioned for growing margins as recovery gains traction. Venture capital has reached a sweet spot where attractive valuations meet rising demand across a variety of markets. Private equity firms are racing toward emerging markets, attracted by their compelling growth opportunities, and the exit markets are reviving. The financing markets seem to have stabilized as the increased availability of debt has allowed GPs to extend maturities of their existing companies, deleverage and finance acquisitions.
 

Larrry Unrein

Head of Private Equity and Hedge Fund groups

 
Real Assets
The Makings of a Memorable Vintage Year (pdf)
This essay contends that the higher risk end of the commercial real estate market may hold substantial rewards for prudent investors over the next few years. Core real estate investments rebounded in 2010 and figure to do well again in 2011 in our view. But we see greater potential in more opportunistic investments. A strengthening economy, still low interest rates and the availability of financing, combined with a broad range of compellingly priced "distressed" assets after the shocks of the last decade, point to fundamentals that offer the possibility of strong risk‐adjusted returns.
 

Joe Azelby

Head of Global Real Assets

 
Hedge Funds
A New Paradigm (pdf)
This essay advocates an innovative approach to considering hedge funds in the context of a broadly diversified portfolio. Rather than segregating these investments as a discrete “alternative assets” allocation, the article suggests integrating individual hedge funds into traditional asset classes, based upon their specific risk factors. A long/short equity fund, for example, would become a component of a total equity allocation, just as a convertible arbitrage strategy might fit within fixed‐income. The approach can result in greater diversification, and may lead to greater downside protection and ultimately superior returns.
 

Corey Case

Co-head and Chief Operating Officer
J.P. Morgan Alternative Asset Management

 
Global Multi Asset Strategy
Mitigating Tail Risk Exposure (pdf)
This essay offers several strategies for investors actively seeking ways to hedge investment tails—the low‐probability risks that could have a severe impact on portfolio performance. It points to a combination of basic asset allocation principles: proper sizing of risk, accurate analysis of liquidity and effective use of leverage that can help address these tail risks. However, the discussion extends beyond these basics to option strategies and strategies that can deliver asymmetric returns to help address volatility and mitigate tail risk.
 

Jeffrey Geller

Chief Investment Officer,
Global Multi Asset Group, Americas

 
Asset Allocation
Decision Making Under Different Economic Regimes (pdf)
This essay proposes an alternative to conventional asset allocation. While it has long been recognized that asset classes do not respond uniformly to changing economic conditions, the traditional approach to portfolio construction seeks to develop a static all‐season allocation. By examining and modeling the impact on different asset classes of some of the variables that influence economic regimes, we show that an asset allocation approach that systematically accommodates to changing conditions, even imperfectly, may meaningfully enhance portfolio efficiency.
 

Abdullah Sheikh

Strategic Investment Advisor

 
Defined Contribution
Strengthening Participant Outcomes (pdf)
This essay calls on plan sponsors to design fund menus with a view to optimizing outcomes for participants—not only for younger participants in the accumulation phase of their careers, but also for the rapidly growing population of decumulators, participants in retirement or close to it. The article proposes different lists of investment choices appropriate to each DC segment: building blocks for do‐it‐yourself investors and more comprehensive solutions that span across the asset classes.
 

Anne Lester

Portfolio Manager, Global Multi-Asset Group

 
 
 


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