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Global Tactical Asset Allocation Building responsive and resilient portfolios for today’s complex investment markets J.P. Morgan Investment Academy Series.

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Presentation on theme: "Global Tactical Asset Allocation Building responsive and resilient portfolios for today’s complex investment markets J.P. Morgan Investment Academy Series."— Presentation transcript:

1 Global Tactical Asset Allocation Building responsive and resilient portfolios for today’s complex investment markets J.P. Morgan Investment Academy Series FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION

2 A history of asset allocation 1 First documented strategic allocation The Talmud recommends “a third in land, a third in merchandise, a third in cash.” 400 B.C Modern Portfolio Theory Proposes the importance of diversification and selecting portfolios, not individual securities. Tactical asset allocation emerges A more actively managed approach adjusts the weight of assets in response to changing market conditions. Asset allocation expands beyond the U.S. Investors begin incorporating international assets into portfolios. Strategic and tactical allocation programs grow New computing abilities and legislation continue to evolve the investing landscape. Tactical overlay strategies go mainstream. Demand surges for downside protection. With the global financial crisis, investors seek strategic and tactical allocation solutions that offer downside protection. With growing technology and greater access to investments, today’s investing landscape is forever changed.

3 FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION Investing in volatile markets 2 The traditional rules of investing are no longer providing the results investors seek.

4 FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION Investors need to be better diversified 3 This hypothetical “asset allocation” portfolio returned 118% over 10 years through June 2013, with less volatility, compared to the S&P 500’s return of 98%.

5 FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION Asset allocation trends 4 Investors are seeking more from their investments since the financial crisis, including superior risk-adjusted performance. Investor expectations Greater transparency Helps investors reach their goals and understand what they own Risk management Provides knowledge of risks being taken and how investors are being compensated for those risks Active management Requires more expertise and monitoring than ever

6 FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION Global tactical asset allocation 5 Investing anywhere in the world, including both developed and emerging markets.

7 FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION Strategic versus tactical: understanding the difference Strategic – Destination oriented – Longer term in nature Tactical – Intermediate and shorter-time horizons – Responsive to changing conditions – Views may be alpha-focused to enhance returns or risk-oriented to protect capital – Flexibility 6 While strategic allocation takes the long view, tactical allocation actively responds to changing conditions.

8 FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION Strategic allocationIntermediate allocationTactical allocation Time horizon10+ years1 – 3 years3 – 12 months Allocation considerations Cycle-neutral, secular and structural trendsCyclical factors Momentum, technical and event-driven factors Review and implementation Long-term capital market views reviewed annually; infrequent adjustments Weekly review of qualitative views; structured review three times per year Weekly review of qualitative views; monthly run of qualitative models Sample allocation Overweight high yield and underweight investment grade Overweight lower beta sectors and underweight higher beta sectors Asset allocation decision-making timeline: Strategic 7 The manager seeks to achieve the stated objectives. There can be no guarantee they can be met. With a time horizon of 10 years or longer, strategic allocation adjustments are infrequent.

9 FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION Determining the strategic allocation framework 8 Region Asset class Equities REITs Convertibles High yield Investment-grade fixed income Non-agency mortgages Emerging markets debt Capital structure Strategic decisions consider the region, asset classes, types of securities and overall risk. Strategic allocation Commercial paper Bank loans Bonds Convertibles Preferred stock Common stock World-wide investments, including both developed and emerging markets

10 FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION Asset allocation decision-making timeline: Intermediate and tactical 9 The manager seeks to achieve the stated objectives. There can be no guarantee they can be met. Tactical allocation is active and responsive, which helps to exploit opportunities and avoid loss. Strategic allocationIntermediate allocationTactical allocation Time horizon10+ years1 – 3 years3 – 12 months Allocation considerations Cycle-neutral, secular and structural trendsCyclical factors Momentum, technical and event-driven factors Review and implementation Long-term capital market views reviewed annually; infrequent adjustments Weekly review of qualitative views; structured review three times per year Weekly review of qualitative views; monthly run of qualitative models Sample allocation Overweight high yield and underweight investment grade Overweight lower beta sectors and underweight higher beta sectors

11 FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION Beyond strategic asset allocation May help limit portfolio losses caused by market spikes and downturns Acts as an added layer of protection 10 Tactical Asset Allocation Tactical allocation also provides an active risk management dimension.

12 FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION Asset allocation moves within a GTAA portfolio 11 DriverOutcome September 2007 Volatility was increasing, dividend yields were low and real estate concerns were growing Tactical decision: Brought the REITs allocation from 9% down to 0% in favor of global equities Dec 2010 – May 2011 More positive near-term views show attractive growth prospects within the emerging markets Shorter-term tactical decision: Increased allocation to emerging markets equity by selling U.S. and international equity May 2011 Our proprietary research pointed to the fact that need for inflation protection in the years approaching and in retirement Strategic modification: Added basket of inflation sensitive asset classes to the glide path, such as TIPS, commodities, REITs and global natural resources January 2012 Intermediate decision: A combination of helpful Fed policy and the recovery in key housing data Intermediate decision: Began building up the non-agency mortgage allocation J.P. Morgan makes key tactical decisions and adjustments in view of market events and observations.

13 FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION How tactical asset allocation relates to investor needs 12 Solutions Asset allocation framework Nimble with risk Increased diversification among asset classes Portfolio constraints Volatility/drawdown risks Seek to ensure appropriate levels of risk Access to difficult to invest in asset classes  Non-agency mortgages  Emerging market debt Investor challenges Traditional sources of income at all-time lows Interest rates expected to rise Global diversification hard to achieve without professional help Tactical oversight requires greater resources Inflation True global diversification and effective asset allocation are hard for investors to achieve on their own.

14 FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION Global tactical asset allocation A contemporary investment strategy that: – Optimizes diversification across a large, global universe of investments – Enables the manager to make gradual adjustments to the neutral strategic asset mix based on an assessment of current market cycles and conditions  To capitalize on an opportunity to enhance returns or to shield the portfolio from unwanted risk – Seeks to generate long-term competitive returns by exploiting shorter-term opportunities – Aims to reduce overall portfolio risk and limit portfolio losses caused by short-term volatility 13 A contemporary GTAA strategy may be an appropriate solution for many of today’s investors.

15 FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION Building responsive, resilient portfolios As a complement to other holdings As a complete, stand-alone portfolio solution As a component of a broader asset allocation strategy 14 GTAA is a timely strategy for achieving any number of investor goals.

16 FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION Summary The world has changed Global tactical asset allocation is a contemporary investment strategy that optimizes diversification across a global universe of investments that seeks to generate long-term value by exploiting shorter-term opportunities Active risk management can provide an added layer of protection to limit portfolio losses caused by short-term volatility and prolonged market downturns. A well-diversified asset allocation program — one that combines a strategic selection of assets, and has the flexibility to make more frequent, tactical allocation decisions based on the economic climate — can provide the framework for successful, long-term investment in today’s global financial markets. 15 GTAA provides the framework for successful, long-term investing.

17 FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION Thank you 16

18 FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION Disclosures The above commentary is intended solely to report on various investment views held by J.P. Morgan Asset Management. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc. © J.P. Morgan Chase & Co., July


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