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"Clients can tolerate you getting it wrong, but they will not tolerate you hiding things from them. It is their money after all"
Doug Wurth, JPMorgan
JPMorgan Private Bank’s client assets increased by 12% to $683 billion in 2009. The bank added 15% more net new clients over the year and grew its client-facing employees by 20%. It has become a safe haven for private clients, particularly those with more than $30 million in assets, making it Euromoney’s number one private bank globally for ultra-high-net-worth individuals.
Unlike many of its peers, JPMorgan has not suffered from management turmoil and its future was never in doubt, even at the height of the financial crisis. The mantra "we therefore could focus on clients" is now being repeated by all those private banks that avoided near-death experiences but Doug Wurth, chief executive of JPMorgan’s international private bank, insists there is a great deal of truth in it. "It really has been difficult for clients to trust advice from a bank that cannot manage its own investments," he says.
Wurth adds that advisers have benefited from being part of a bank that is not dealing with changes in management or constant questioning of its economic viability, as valuable time has not been taken up fielding client concerns about anything other than investments. "The last 18 months have been one of the hardest investment periods that clients and private bankers have known," he says. "It has been essential to stay on top of the game." Wurth discusses how JPMorgan Private Bank has tackled the demanding investment period, and where the next opportunities lie for the bank and its clients.
Q: It was a year that started off looking like Armageddon but ended on a reasonably positive note. What kind of challenges did that bring?
We were always on the edge of our seat. Liquidity was key for clients, and while they were very cautious at the beginning of 2009, they wanted the ability to move assets quickly – be that moving into cash immediately or moving aggressively out of cash into new opportunities. Investments with more than a one-year lock-up period were unpopular most of the year. That is a very difficult mindset to deal with, given that portfolios are supposed to be managed on a long-term basis with a long-term view.
Q: Cash was clearly king for the first few months of the year. What were the first investment opportunities you did see for clients?
Equity markets were far too volatile in the first quarter of the year, so credit was the initial move. Leveraged loans, CMBS, convertible bonds, RMBS – markets that had been oversold. Those markets offered equity-like returns. We focused on investing in the top of the capital structure, which means clients were being paid yields while they – and we – waited for greater certainty as to where the markets were heading.
Q: Were clients happy to take this advice?
The fear for most clients was simply the unknown. They wanted to fully understand what they were investing in, and last year – and we suspect this will be the case from now on – they wanted a better sense of what the risks are, a better stress-testing of their portfolios. Essentially, while we give advice to the best of our abilities we still need to be honest about what would happen if we were wrong. No client wants to be surprised. Our chief investment officer sends out an e-newsletter called Eye on the market every week to clients, but during the most difficult market periods last year we were sending out two or three a week. We organized conference calls and brought managers out in front of clients. We also initiated a series of white papers looking at opportunities. Clients can tolerate you getting it wrong, but they will not tolerate you hiding things from them. It is their money after all.
Q: JPMorgan Private Bank has $40 billion in alternative assets under management, and invests in third-party hedge funds and its own hedge fund, Highbridge Capital. Did clients turn away from hedge funds because of concerns about transparency, and how did you manage that?
Wealthy individuals globally were concerned that some managers invested in areas outside their remit or stayed in concentrated positions instead of being diversified. However, managers often have wide discretion in their mandates. That’s why we dedicate so many resources to our hedge fund platform. And we also diversify managers in portfolios in order to mitigate risk. But keeping our clients informed and being honest about things going right and wrong kept us as a trusted partner, and led to over $7 billion of new hedge fund flows in 2009.
Q: Performance was also a problem for hedge funds during the early stages of 2009 when they had promised returns in down markets. Do you feel clients’ appetite for hedge funds has been permanently harmed?
No. To say that hedge funds have lost their touch is incorrect. It is now clear which funds were just levered beta and riding up the market. Yes, there was a performance crisis for hedge funds but the conclusion that hedge funds cannot perform in declining markets as promised is wrong. In the first quarter of 2009, hedge funds were actually up while the S&P and the MSCI World Index were down 11% and 12% respectively. It was frozen markets that crippled hedge funds, not declining markets.
Q: Are there any investments that stand out in 2009 as being particularly suited to high-net-worth clients?
Oil was one. We bought oil in client portfolios in January last year at $38 a barrel, versus around $81 today. Back in the spring, as we saw the liquidity squeeze taking place with respect to some of the Ivy League endowments, we raised a fund to do secondary private-equity investing.
Q: As we move further away from the depths of the financial crisis, where have you been advising clients to invest?
We still see value in high yield and leveraged loans, but we expect credit to play a smaller role in our portfolios in 2010. The latest investment we made was in a portfolio of equities that automatically converts to cash if the market goes up another 7% or 8%. So we are looking to benefit from this globally coordinated reflation experiment but want to do so in a very disciplined and cautious way, because we want to maintain our ammunition for what lies ahead.
There has also been a move to distressed real estate, private equity and opportunities to buy operating companies and dead banks – buying debt or equity with the hope of owning those businesses. So essentially clients have shifted from being a lender to an owner.
Q: Can you tell us any more about buying up banks?
We like the idea of investing with a management team to buy a healthy regional US bank that has room for growth. Smaller US banks are under pressure and need to sell their distressed loans. A healthy regional bank with FDIC-approved status could buy the distressed loans of smaller banks as well as consolidate failed or weaker banking institutions. It is an interesting investment opportunity. Distressed markets in general look interesting as there is not enough syndication and not enough banks with capital to lend.
Q: Do you think investors have reason to be positive about 2010?
There is a cautious optimism that the economy is getting better for sure as there are a number of compelling signs of recovery. Inflation is low, interest rates are staying low, and productivity and operating levels in the corporate sector appear solid. The concern is, are these just the results of stimulus? How much of the green shoots we are seeing is grass and how much is just artificial turf? On a positive note, over the last three months there is a better sense that valuations can be trusted more. That helps in investment choices whether a client is bullish or bearish.
Q: Where will JPMorgan Private Bank be placing its bets? You’ve recently moved to Hong Kong – is that a clue as to where the bank sees growth coming from?
International markets are certainly our key priority in the near term. Asia is seeing greater growth in the ultra-high-net-worth space than any other region. Brazil, Mexico and Russia are also areas of wealth creation. The investment landscape in each of those regions is expanding also.
Clients there want more complicated types of investment now as markets are developing. Debt markets are maturing with corporate debt being issued, and sovereign debt is now going out 10 to 20 years. That means they are looking for new banking partners to entrust their wealth to and invest with, and so we need to be on the ground to be that partner.