JP Morgan has partnered with Morningstar as the strategy allocator behind its new JP Morgan Morningstar Alternative Strategy.
"For this launch we are leveraging on our long-running franchise in mutual fund derivatives which enables us to offer structured products linked to mutual funds," said Nicolas Robin, head of equity derivatives specialist structuring at JP Morgan. "However, this new product is unique in the sense that it's responding to a specific demand from investors seeking exposure to alternatives or absolute return Undertakings for the Collective Investment of Transferable Securities (Ucits) funds."
The strategy provides exposure to a synthetic basket of mutual funds selected by Morningstar's investment management team which will act as allocator and will select the basket of mutual funds underpinning the strategy, adjust their weights on an ongoing basis and review both the universe of mutual funds considered and the selected mutual funds.
"The fund selection adds a unique angle to the product as it has a qualitative and a quantitative allocation approach," said Robin. "Most of the strategies you find in the alternatives segment are algorithmic driven but being able to deploy the skills of Morningstar investment team adds a truly qualitative element to the fund selection process. We were looking for a top provider of analysis in this segment to leverage their expertise when it comes to the selection of the pool of alternative funds the product will deploy on a quarterly basis."
JP Morgan will act as strategy sponsor and calculation agent, and will facilitate access to the strategy via a number of structured solutions offered to retail and institutional investors. "The initial target is retail investors looking for principal protection and attractive risk adjusted returns but we think this product will also resonate with the private banking segment in leveraged format," said Robin.
This area is getting increasing attention from investors as it is expected these strategies will have a low volatility exposure and will generate uncorrelated returns, according to Robin. One of the attractions of investing in the alternatives space is the premise that these funds could minimize losses on the market downturns and could offer stable returns on the upside. The JP Morgan Morningstar Alternative Strategy could be attractive to investors concerned with capital security and willing to take some risk to achieve investment returns in excess of cash over a medium-term horizon.
"There has been a dramatic increase in the number of active funds available in this space, making it harder to assess the relative qualities of strategies and manager track records when building a balanced portfolio," said Robin. "In addition, although the funds fall under the same category they do implement different strategies and offer exposure to different asset classes. Investor appetite for alternatives is rapidly increasing, especially in the current unpredictable market environment."
Eligible funds will have to be classified within one of the Morningstar Alternative Categories, which include fixed income, multi asset, and equity funds and currently comprise more than 2500 Funds. Additional Criteria checks include tradability, size and track records. In addition, ongoing rebalancing and calculation will take place.
Morningstar will review allocation on a quarterly basis, and potentially adjust the universe, and/or the selected mutual funds and weights. The initial constituent funds will be 40% equities, 45% multi-asset and 15% fixed income.
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