JP Morgan believes it has produced the first asset allocation strategy based on smart beta. The Efficiente Smart Beta Index applies the same methodology as the bank’s other Efficiente indices and is primarily based on momentum with a risk control allocation strategy on smart beta underlyings, said Deepak Maharaj, executive director at JP Morgan in London.
“Smart beta underlyings aim to track benchmark underlyings, but with enhancements via systematic overlays,” said Maharaj. A typical example would be a low volatility version of an equity benchmark index. Efficiente is an asset allocation strategy driven by momentum, which is a smart beta, and was originally used by JP Morgan on cross-asset benchmark underlyings, mainly the S&P 500, Eurostoxx 50 and Nikkei 225.
The prompt to develop the new index has been the massive increase in the demand and supply for smart beta underlyings, said Maharaj. “We have seen a lot of growth in the structured products space from both the index providers, who are creating new and interesting smart beta tilts to standard benchmarks, as well as demand from investors,” said Maharaj. Investor demand has been from retail but also private banking investors.
“We have tried to narrow down the core smart beta assets that are available from the universe of available underlyings: these are typically low volatility or high dividend equity indices across US, Europe, Asia and Emerging Markets, as well as, where possible, some smart beta underlyings in other asset classes,” he said. “For instance, in commodities, instead of using the S&P GSCI front-month index, we use the S&P GSCI third month index, which is rolling the third month contract. In property, instead of using a global property benchmark, we use a high dividend yield property index. And then there is the ‘safe’ asset, typically bonds as one of the components of the Efficiente.”
Efficiente has been used in over 700 structured products marketed in the US market by JP Morgan, according to SRP data, with a touch above US$3bn of structured retail note and CD (certificate of deposit) issuance in the US market linked to the main varieties of the ETF Efficiente strategies since the first family index launch at the end of 2010.
The Global X/JP Morgan Efficiente ETF product was listed in October 2014 and had a market capitalisation of $16.96m with 650,000 shares outstanding on March 12. An ETF that JP Morgan launched simultaneous, the Global X/JP Morgan US Sector Rotator ETF had a market cap of $26.42m and outstanding shares of 1.1m on the same day.
Efficiente has also served as an underlying for structured products issued in the following countries in Europe: Poland (20 products), Sweden (4), Ireland (6), Estonia (4), Italy (3), Switzerland (2), Finland (2) and Denmark (2); and in Australia (5), Canada (7), and Chile (1). “In Europe, we are in discussions with a few providers to launch a European version,” said Maharaj.
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