JPMorgan offers alternative strategy fund to protect capital amid Covid-19 pandemic

Fortunately, JPMorgan Asset Man­agement (JPMAM) has opened the Multi-Manager Alternatives Fund to Singapore retail investors since March. The fund, which was registered in Sin­gapore late last year, was previously available only to accredited investors.

“In Singapore, we find that inves­tors and gatekeepers are always on the lookout for unique solutions to diver­sify and strengthen their portfolios — taken together with a successful 2019, we felt the time was right to make the solution more broadly available, start­ing with Singapore,” Randy Wachtel, portfolio manager of the fund, tells The Edge Singapore.

Launched in 2016, the fund aims to provide long-term capital appreciation by employing a variety of alternative strategies and techniques, using deriv­atives where appropriate. These strat­egies and techniques include merger arbitrage/event-driven, long-short eq­uity, relative value, credit, opportunis­tic/macro and portfolio hedge.

According to Wachtel, the fund is “uniquely positioned” to offer investors the ability to protect capital in these volatile times. Yet it also has the “tac­tical ability” to quickly reallocate cap­ital to emerging areas of opportunity.

For instance, Wachtel notes finan­cial markets in March have been pain­ful for some investors. But there are others who have been waiting on the sidelines because of high valuations. This group, he says, will have a first mover advantage.

“Timing the market bottom is [ex­ceedingly] difficult and instead it is worth considering alternative solutions that are liquid and dynamic, so as to take advantage of the investment op­portunities that are being borne out of current market dislocations,” he says.

Thus far, the performance of the fund’s Singapore dollar-denominated A-class share — which is the distribu­tion share class here — has yet to be indicated, according to the factsheet. However, the fund’s US dollar-denom­inated A-class share has a negative re­turn of 1.28% so far this year to April, underperforming the 0.42% return of its benchmark — ICE 1 Month USD LI­BOR. It has an expense ratio of 2.6%.

Still, the underperformance is bet­ter than the Straits Times Index’s year-to-date decline of 22%. Moreo­ver, the fund’s US dollar-denominated A-class share has had a stellar 2019. It returned 7.14%, outperforming the benchmark’s 2.28%. Since inception, this share class has returned 1.72% on an annualised basis, outperforming the benchmark’s 1.49%.

“While the recent market environ­ment has certainly been difficult for all asset classes, we believe the longer-term record of our platform is in line with what investors can expect from this fund. In the near-term, this is an excellent time for retail investors to consider allocating to the fund as [it] is flexible and well positioned to take advantage of dislocations arising from the recent volatility,” says Wachtel.

‘Managed accounts’

A key distinction of the fund is the way it is run. As the fund’s name suggests, the Multi-Manager Alternatives Fund is not managed directly by JPMAM. Rather, the fund hires sub-investment managers not affiliated with JPMorgan Chase & Co to implement alternative strategies on behalf of the fund.

“While [like] a fund of funds in terms of its diversity of investments, using managed accounts rather than investing in individual funds provides significant advantages. The accounts are managed exclusively for the fund and therefore can be customised to our specifications where appropriate. Fur­thermore, the full transparency on a daily basis provides for a superior abil­ity to oversee and manage risk with­in the portfolio as compared to a tra­ditional fund of funds,” says Wachtel.

So why does JPMAM not run the fund itself? Wachtel says this approach allows the fund to build “truly” di­versified and uncorrelated portfolios.

This, however, does not take JPMAM away from the driving seat. Wachtel says JPMAM supervises the fund via a two-pronged approach — by combin­ing a top-down perspective evaluating 23 unique investment strategies with deep bottom-up analysis designed to identify some of the most talented spe­cialists within their strategies.

As Wachtel explains, the top-down perspective helps to guide the research priorities of the sub-investment man­ager and optimise their portfolio allo­cations, while the bottom-up analysis covers a detailed research process to evaluate, analyse and select the best alternative managers. The selection criteria include experience, calibre of staff, repeatability of process, approach to risk management and operational infrastructure, he says.

Illustrating an example, Wachtel says the two-pronged approach has enabled the fund to gain a certain type of expertise of which JPMAM calls as “emerging managers”. These alternative managers are identified as those with a smaller size of assets under manage­ment or having a fund that has com­menced operations not too long ago. “Not all of the managers in the fund are considered emerging managers but they are an important aspect of the complexion of the fund,” he says.

So, what happens if a sub-invest­ment manager underperforms? Wa­chtel says the first step is to identify the drivers of the underperformance. This will then be evaluated in the con­text of JPMAM’s expectations amid the broader environment. The evalu­ation includes a robust factor and peer analysis to understand if the underper­formance was in line with other man­agers implementing a similar strategy.

In fact, such a situation could be an opportunity for the fund to allo­cate more capital to an underperform­ing manager, instead of deallocating, says Wachtel. For instance, he notes that one of the fund’s sub-investment managers, who specialises in small cap companies, has underperformed. The trailing 12-month performance of small cap companies compared to large cap companies is at nearly the widest point in the last 20 years, he says.

“However, the small cap versus large cap factor is one that should mean revert over time, particularly in an economic recovery. Therefore, we have not only allocated more to this manager; but also worked with them to customise their trades to accentuate the small cap versus large cap spread,” says Wachtel.

Thus far, the fund has not termi­nated any sub-investment manager based on underperformance. But it has dropped one sub-investment manag­er as the latter had decided to wind down their firm to focus on another opportunity. The fund then reallocat­ed the capital to the other sub-invest­ment managers, says Wachtel.

Opportunities amid Covid-19

As at end-April, the fund had 627 holdings and 76 holdings on long and short positions, respectively. This com­prised equities, currencies, commodi­ties, credits and rates. In terms of allo­cation by alternative strategy, the fund mostly employs long/short equity, fol­lowed by merger arbitrage/event driv­en and credit.

Wachtel says the fund is currently focused on these three alternative strat­egies as JPMAM and the sub-invest­ment managers see opportunities there amid the pandemic. For instance, the fund has a “large position” in a com­pany that offers board of directors and trust services. The company has trad­ed at a significant free cash flow valu­ation and the business is only modest­ly impacted by the global shutdown, he says. Furthermore, the business is used to working from remote locations as most board meetings are already conducted via teleconference, he adds.

The fund also sees opportunities in merger arbitrage. Amid the sell-off in March, merger spreads have widened to “once-in-a-decade levels”, says Wa­chtel. “…As much of that spread has come back in, we are now starting to take the other side and spending our time looking at deals where the prob­ability of completion is lower than ex­pected,” he says.

That aside, the fund has increased its allocation to investment grade struc­tured credit, such as investment grade collateralised loan obligations and oth­er asset backed tranches. This asset class has seen significant price decline, though there is a reasonable amount of subordination, he says.