The fastest-growing mutual fund firm? A bank

JPMorgan Chase & Co. (JPM) is proving that banks aren’t destined to be also-rans in the $12 trillion mutual fund business.
The company in 2011 became the first bank to crack the list of 10 largest U.S. stock and bond fund managers, according to research firm Strategic Insight. Under global funds chief George Gatch, JPMorgan’s lineup posted higher net sales growth as a percentage of assets than any other firm with at least $50 billion, even as the bank spurned the charge by investors into index funds and posted middle-of-the-pack fund returns.
“Their performance as an asset gatherer has been phenomenal,” Geoff Bobroff, a mutual fund consultant in East Greenwich, Rhode Island, said in a telephone interview. “Their fund performance isn’t one to gather a lot of attention, but they’re solid from a business standpoint.”
While rival banks sought to sell asset management units following the financial crisis, JPMorgan escaped relatively unscathed, allowing it to spend on the unit and lift long-term fund assets by 160 percent since 2008. The largest U.S. bank by assets succeeded in part by courting financial advisers to complement its in-house sales force and by offering hedge-fund- like products that have become more popular as investors flee traditional stock funds.
Funds owned by banks, brokerages and insurers have lost ground over the past decade to pure money managers such as Vanguard Group Inc. and Franklin Resources Inc. (BEN)
The asset management unit, which also includes money funds and separate accounts for institutions and wealthy investors, produced 11 percent of JPMorgan’s $21.5 billion in fourth- quarter revenue and 8.1 percent of its profit.
‘Avenue of Growth’
“It’s still a relatively small piece in terms of its total contribution to earnings, but it’s an avenue of growth at a time when growth in traditional banking has been constricted,” said Shannon Stemm, an analyst at Edward D. Jones & Co. in St. Louis.
Net deposits of $17.9 billion in 2011 were the third- highest dollar amount in the industry, trailing only those of Valley Forge, Pennsylvania-based Vanguard and Pacific Investment Management Co. in Newport Beach, California, according to data compiled by Morningstar Inc. As JPMorgan’s long-term fund assets grew to $139 billion, the firm climbed four spots on the research company’s list, leapfrogging rivals including 10th- ranked OppenheimerFunds Inc.
“We want to remain in the top five in net flows every year for the foreseeable future,” Gatch said in an interview at his New York office. “If we do that, we’re well-positioned as the markets normalize.”
Vanguard, with $1.31 trillion in stock and bond mutual funds as of Dec. 31, is the biggest manager, followed by Los Angeles-based Capital Group Cos.’ American Funds, Boston’s Fidelity Investments and Pimco. The data exclude money market funds.
Ignoring Indexing
JPMorgan’s success has come through a mix of old and new strategies.
Gatch, 49, who joined the firm in 1986 and took over the mutual funds business in 2001, has driven growth in part through an internal sales force of financial advisers who can sell the firm’s funds as well as those of rivals, a fading approach that some observers say creates a conflict of interest. He’s also pouring resources into capturing business from independent registered investment advisers, or RIAs, the fastest-growing competitor to traditional brokers.
Gatch has done it almost exclusively with actively run funds, another anachronism. U.S. investors pumped 2 1/2 times as much money into index-tracking funds, including exchange-traded products, in the past five years as they did into those whose managers pick securities. That leaves JPMorgan winning more business in a shrinking portion of the funds industry.

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At the same time, the bank has been innovative in designing funds that bring institutional-style investing options to individual customers.
In 2005, it opened JPMorgan U.S. Large Cap Core Plus (JLPSX), a so- called 130/30 fund designed to bet on stocks rising and declining, and JPMorgan Tax Aware Real Return, which combines inflation and tax protection. The firm’s go-anywhere absolute- return bond fund, JPMorgan Strategic Income Opportunities Fund (JSOAX), was started in October 2008 and has $13 billion in assets. The $2.45 billion Highbridge Dynamic Commodities Strategy, a fund that can wager on or against commodity-linked securities, began in January 2010.
“On the whole, they’ve had good performance, they’ve been imaginative in the funds they’ve opened and been very aggressive in marketing them,” Burton Greenwald, a mutual fund consultant in Philadelphia, said in a telephone interview.
In the wake of the global financial crisis, rivals including Bank of America Corp. and Citigroup Inc. (C) cut jobs and sold off units to raise capital, leaving JPMorgan the biggest bank by assets by the end of last year’s third quarter.
Marketing Push
Its relative good health has allowed the firm to commit more resources to asset management. Spending on sales and marketing will rise 10 percent this year compared with 2011, according to Gatch and his institutional counterpart, Michael O’Brien. They declined to disclose dollar figures.
In addition to its stock and bond mutual funds, JPMorgan managed $293 billion for institutions as of Dec. 31, up 15 percent in two years. The company also runs money market funds and institutional cash products holding about $456 billion.
Gatch casts the rise of JPMorgan funds as a turnaround that began soon after the bank’s 2006 purchase of Bank One Corp. The deal led to the largest merger of mutual fund companies to that point, he said.
“The two bank fund families were muddling along,” Gatch said. “We changed our expectations and objectives.”

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The combined lineup was trimmed almost immediately by 14 percent, to 122 funds. Sales teams were rebuilt and refocused on backing up products with market analysis and investing guidance.
“We were trying to train people in things that weren’t our expertise, like practice management and estate planning,” Gatch said.
JPMorgan is appealing to RIAs by establishing a reputation for putting research first and the hard-sell second.
In 2008, the bank hired David Kelly as chief market strategist and started his “Dr. Kelly” series of online audio and video reports. Kelly, who has a Ph.D. in economics from Michigan State University, held an Aug. 8 conference call for advisers on Standard & Poor’s downgrade of U.S. debt that attracted 7,900 participants. The firm also stages invitation- only seminars for financial advisers in which strategists, portfolio managers and analysts make presentations and answer questions.
“They realized that top RIAs want to be treated like institutional clients,” said Donald Phillips, managing director of Chicago-based Morningstar. “They want information and commentary. They don’t want sales pitches.”
Independent Advisory Channel
Deposits through RIAs grew by 30 percent last year, said Kristen Chambers, a JPMorgan spokeswoman, who declined to disclose the dollar volume.
The rise of the RIA has accompanied a decline among brokerages. The amount of money fee-only RIAs in the U.S. oversee increased by 25 percent to $1.3 trillion in the three years through 2010, the latest year for which data were available, according to Cerulli Associates in Boston.
During the same period, client assets at the four largest broker-dealers, known as wirehouses, fell by 12 percent to $4.78 trillion even as the firms gradually shifted to fee-based client accounts. The money overseen by bank-owned broker-dealers such as JPMorgan’s decreased by 12 percent to $464.2 billion.
‘Supermarket’ Era Ends
The grip of big advisory networks on mutual fund sales has also loosened. As recently as the 1990s, brokers, banks and insurance companies dominated the top 20 spots among U.S. mutual fund families, when money funds are included in total assets. That changed as competition, regulatory scrutiny and the decline of the “financial supermarket” model at companies such as Citigroup Inc. led many distributors to sell their in-house fund brands, Loren Fox, a senior research analyst at Strategic Insight in New York, said in an e-mail.

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The split between the advisory and investment management businesses gathered momentum in the past five years as brokerages moved toward a fee-based business, which meant more of their representatives had a legal duty to act in the best interest of clients, Bobroff said.
Potential Conflicts
“As a fiduciary, the conflict is substantial, and thus all the divorces,” Bobroff said.
Citigroup, then part-owner of brokerage Morgan Stanley (MA) Smith Barney, sold its money management business to Legg Mason Inc. (LM) in 2005. Merrill Lynch unloaded its mutual funds to BlackRock Inc. (BLK) in 2006, and Morgan Stanley (MS) sold its retail funds business to Invesco Ltd. (IVZ) in 2010.
JPMorgan not only hasn’t abandoned proprietary fund sales, it has beefed up its sales force. The number of financial advisers at the Chase retail banking network; JPMorgan Private Bank, which caters to ultra-high-net-worth clients; and JPMorgan Securities, a brokerage unit, has grown by 48 percent in the past three years to 5,220.
The internal sales channels account for about 20 percent of net deposits to JPMorgan’s mutual funds, Gatch said.
Among other top 10 families, only Columbia, owned by Minneapolis-based Ameriprise Financial Inc., has a related unit of financial advisers offering its funds alongside those run by others. San Francisco-based Wells Fargo & Co. is the only wirehouse with a funds unit on Morningstar’s list of the 50 largest families.
‘Opposite Direction’
“The whole industry has been moving in just the opposite direction,” Greenwald said. “As long as their funds perform well, they’re OK, but there’s a real or implied conflict of interest when you sell your own brand of funds. If performance falls, it could be an issue.”
JPMorgan doesn’t enjoy any advantage over competitors offered at Chase and the private bank, as sales agents have no extra incentives to sell in-house funds, according to Gatch.
“We operate on a level playing field with other investment management firms,” he said. Gatch chalked up the internal sales to his staff’s insight into the needs of Chase clients and JPMorgan’s ability to deliver a product “as good, if not dramatically better, than what our competitors offer.”
JPMorgan funds have been solid, albeit unspectacular, Greenwald said.
Bond Fund Strength
The stock and bond funds, on average, beat 47 percent of competitors in 2011, 53 percent over the past three years, 56 percent over five years and 57 percent over 10 years, according to Morningstar. The data, which isn’t weighted by assets, exclude funds of funds.
JPMorgan funds aim to produce consistent risk-adjusted returns, Gatch said.
“They’re not going to blow you up, but they’re not going to place you in the top rankings,” Rob Wherry, a Morningstar analyst, said in a telephone interview.
The returns of the firm’s four biggest funds, all of which focus on bonds, have generally been stronger. They beat 57 percent of competitors in 2011, 38 percent over three years, 81 percent over five years and 80 percent over 10 years.
“Their fixed income is certainly what stands out,” Wherry said.
JPMorgan’s largest fund is the $24.9 billion JPMorgan Core Bond Fund (WOBDX), managed by Douglas Swanson. The fund outperformed 84 percent of rivals in the five years ended Dec. 31, with an average annual return of 7 percent, according to Morningstar.
‘Multiple Boutiques’
The biggest stock fund is the $7.31 billion Mid-Cap Value Fund (FLMVX), which bested 85 percent of rivals over five years with an average annual return of 2 percent. The fund is managed by a team led by Jonathan Simon.
JPMorgan funds are run by autonomous investment operations including fixed-income teams in Cincinnati; Columbus, Ohio; Boston; and London, as well as equity groups in New York, London and Hong Kong. All manage strategies for both individual and institutional clients.
“The business is built on multiple boutiques sitting on one industrial-strength platform,” O’Brien said.
O’Brien, like Gatch, has worked to beef up sales efforts, while focusing more on customers outside the U.S.
When O’Brien, 48, took his post in 2010, 65 percent to 70 percent of institutional assets came from U.S. clients. He said he is seeking to increase international assets to 50 percent by 2015, with sales targets including defined-benefit pension funds in Europe, global insurance companies and sovereign wealth funds.
No Passive Plans
The company has no interest in building its own passive investing unit, regardless of the popularity of index funds, O’Brien said. He didn’t rule out entering the business via acquisition.
Gatch was less enthusiastic.
“Does beta have a place? Sure,” Gatch said, referring to investments designed to match market returns. “In some cases we’ll use ETFs in diverse portfolios that we manage. But we think we’re going to do a better job for investors if we maintain our focus exclusively on active management.”
–Bloomberg News–