global tactical asset allocation building responsive and resilient portfolios for today’s complex...

Global Tactical Asset AllocationBuilding responsive and resilient portfolios for today’s complex investment markets

J.P. Morgan Investment Academy Series

FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION


A history of asset allocation

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First documented strategic allocation

The Talmud recommends“a third in land, a third in merchandise, a third in cash.”

400 B.C. 1950 1960 1970 1980 1990 2000 2010

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 weightof 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 computingabilities and legislation continue to evolve the investing landscape.

Tactical overlay strategies go mainstream.

Demand surges fordownside 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.

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Investing in volatile markets

The traditional rules of investing are no longer providing the results investors seek.


Investors need to be better diversified

4

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%.


Asset allocation trends

5

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 knowledgeof risks being taken

and how investors are being compensated

for those risks

Active management

Requires more expertise

and monitoringthan ever


Global tactical asset allocation

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Investing anywhere in the world, including both developed and emerging markets.


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

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While strategic allocation takes the long view, tactical allocation actively responds to changing conditions.


Strategic allocation Intermediate allocation Tactical allocation

Time horizon 10+ years 1 – 3 years 3 – 12 months

Allocation considerations

Cycle-neutral, secular and structural trends Cyclical factorsMomentum, 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 andunderweight investment grade

Overweight lower beta sectors and underweight higher beta sectors

Asset allocation decision-making timeline: Strategic

8

The manager seeks to achieve the stated objectives. There can be no guarantee they can be met.

U.S.

Equity

, 30%

Int'l

Equity; 15%

EME, 10%

U.S.

FI, 30%

Int'l FI, 10%

Cash, 5%

U.S.

Equity

, 30%

Int'l

Equity; 15%

EME, 10%

U.S.

FI, 30%

Int'l FI, 10%

Cash, 5%

U.S.

Equity

, 30%

Int'l

Equity; 15%

EME, 10%

U.S.

FI, 30%

Int'l FI, 10%

Cash, 5%

With a time horizon of 10 years or longer, strategic allocation adjustments are infrequent.


Determining the strategic allocation framework

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RegionAsset class

Equities REITs Convertibles High yield Investment-grade

fixed income Non-agency

mortgages Emerging

markets debt

Capitalstructure

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


Asset allocation decision-making timeline: Intermediate and tactical

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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 allocation Intermediate allocation Tactical allocation

Time horizon 10+ years 1 – 3 years 3 – 12 months

Allocation considerations

Cycle-neutral, secular and structural trends Cyclical factorsMomentum, 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 andunderweight investment grade

Overweight lower beta sectors and underweight higher beta sectors

U.S.

Equity

, 30%

Int'l

Equity; 15%

EME, 10%

U.S.

FI, 30%

Int'l FI, 10%

Cash, 5%

U.S.

Equity

, 30%

Int'l

Equity; 15%

EME, 10%

U.S.

FI, 30%

Int'l FI, 10%

Cash, 5%

U.S.

Equity

, 30%

Int'l

Equity; 15%

EME, 10%

U.S.

FI, 30%

Int'l FI, 10%

Cash, 5%


Beyond strategic asset allocation

May help limit portfolio losses caused by market spikes and downturns

Acts as an added layer of protection

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U.S. Equities

Developed Market Equities

Emerging Market Equities

U.S. Bonds

Global Bonds

Commodities

Real Estate

Other

Tactical Asset Allocation

Tactical allocation also provides an active risk management dimension.


Asset allocation moves within a GTAA portfolio

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Driver Outcome

September 2007Volatility 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 2011More 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 2011Our 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 2012Intermediate 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.


How tactical asset allocation relates to investor needs

13

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.


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

14

A contemporary GTAA strategy may be an appropriate solution for many of today’s investors.


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

15

GTAA is a timely strategy for achieving any number of investor goals.


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.

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GTAA provides the framework for successful, long-term investing.


Thank you

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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 2013

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