Welcome to Inside Active, a podcast about active managers that goes beyond sound bites and headlines and looks deeper into their processes, challenges and philosophies and security selection. I'm David Cohne, I lead mutual fund and active Research at Bloomberg Intelligence. Today my coast is Eric Baltoonis, Senior ETF analyst at Bloomberg Intelligence. Eric, thank you for being my coast today.
Great to be here, Dave.
So this is our first episode recorded on location. We're here down in sunny Orlando with our gracious hosts JP Morgan. And since you do cover JP Morgan, I thought i'd let you kick this off.
Yeah.
Look, this is one of the fastest growing companies in a way. You know, they're very big. Everybody knows them. But they were somewhat late to the ETF party, so they were really came into the market maybe around ten years ago. So they had to make up for lost time, and they did. What they did is they found a niche in Active. At the time, Active wasn't really that hot, it wasn't really that popular, and I think I give ARC some credit for getting the hot sauce form of
Active going. And then JP Morgan really got the sort of more traditional active going and they're bond ETF JPST and their stock ETFJEP, which are both active, are the two biggest active bond in stock ETFs in the world, and so they're also the fastest growing except JEFP has a little brother named jef Q, which beat all the records. But anyway, yeah, if you look up jp Morgan is going to be among the top of the list, whether you looking at assets or flows. And ETFs are where.
All the fisher biting.
So if you have an active management strategy in the ETF vehicle and you're at that level, you're really in the prime spot for the future in my opinion. And so it's good to talk to the pms of the really the two biggest, I think most relevant active funds in the world right now.
Great, So in that regard, i'd like to welcome Hamilton Ryner, Managing Director, head of US Equity Derivatives and a portfolio manager for a number of funds, including the JP Morgan Equity Premium Income ETF or what we like to call JEPPI, and James McNerney, managing director and a portfolio manager for income funds including the j P Morgan Ultra Short Income ETF or JPST. Thank you both for joining us.
Today, Thanks for having us, thanks for coming down.
So I thought we'd start off with a big picture question I'd like each to you to answer before we kind of dig into the funds themselves. So you both manage income oriented strategies in a way, very different asset classes. Obviously, how would you define income with discipline today? We can start with you Hamilton.
Sure.
So when you think about income, incomes one of those things that is evergreen. I mean investors like income. You know, in a flatish market, income helps your returns, even in a down market, just getting that monthly payment helps shop in some of the losses of it overall portfolio. So
income today right now I think is everrigating portfolios. It was a challenge to find income for a while when rates were near zero, and so finding a way to deliver income in a consistent manner in an evergreen basis, I think is something that really helps investors in building better portfolios.
Great, how about you, James.
Yeah, I think when we think of discipline, I mean the reason why JPSD resides in the global liquidity business at dablemore where we manage at truty dollars a money market Forlouba JBSC is a bond fund, a very low duration bond fund, but it resides in that business because we want to deliver a high quality, low lall solution that's the next set out of cash. And so everything we do is through a lens of RISKMA the ball,
high deplety and capital preservation. And so we think about delivering current income part into the earth, we want to do it through that lens of a very rigorous wristman and menu rebust process that's going to deliver you know, I pick up relatives taking that step out, but not taking on too much risk to do so.
In fact, just add one thing. When use the word discipline, I actually think predictable is probably you know, a better word than discipline, because when you're predictable, you have an understanding as to what to expect, when to expect it and build and put it into your into your portfolio.
So happy something that's not like consistent, but predictable means that when people want to build models or build client portfolios, having that ability to know what to expect is truly an important part to portfolio construction.
And you know, this is a great point. I used to say this with Arc all the time. People were like, why won't you go to cash? We know when the stock market was going on in twenty twenty two, why won't she do? She just keeps doubling down on these like crazy gross stocks, and I'm like, that's why she maintains volume and assets. It's because in ETFs, the person putting the portfolio together is the active manager, really, and you want each piece to do what it's supposed to do.
So you're not giving your whole money over to somebody to just like pick everything. You want them to stay in their lane and be active. Which brings me to a question for you, Hamilton, which is I've always thought JEFPI is a really interesting fun I always say it's legwork active, so you're not just picking stocks. You're doing this option's overlay, which is again a pain in the butt, right, So you get a convenience factor, But why does it
need to be active? Why couldn't you put this into an index and just not.
Worry about the stock picking part. Sure, so the space has grown in popularity. There's a lot of participants and many people call themselves active, and it's when they talk about the options they're active. I think what differentiates us is it's not just about us being active from an options perspective, and as you said, it has a fair amount of brain damage associated. That will come back to that in a second, but also the stock portfolio. We're
pretty blessed being here at JP Morgan. I mean, our fundamental analyst and the core equity platform. You know, it's about twenty folks with one hundred and ninety million dollars research budget, five thousand meanings per year. It's a competitivedvantage for us. It's a weapon.
So why not utilize that in building a portfolio?
And so when we first thought about whiteboarding what would we like Jeffy to look like, it wasn't just about the income. It was giving you the income some of the upside of the market and finding a more defensive, higher quality portfolio that would weather market selloffs. So if you just bought the index, the only thing protecting you to the downside is whatever modest option premium brought in.
So having that more active defense of higher quality portfolio acts as a modest buffer to the downside, which is significantly better than just having that option's premium. And as you said, there's a lot of brain damage associate with options. Stocks don't die. Stocks either get taken over, they go bankrupt, or.
They last forever. Options die.
And in order to have a strategy that uses options, you need to have a best in class middle office, back office, clearance, custody, colliudal management, cash management.
It's hard.
It's why so many people outsource the investing part of an option or into strategy in the ETF space.
Eric, So, I'm glad you brought that up. We're talking about options, and then you know stock picking. How do you balance the goal of delivering regular income with long term total return potential?
Sure, so you know, our north star has always been about delivering predictable income, but doing it in a way that balance is upside and income. There are some strategies that will forego one hundred percent of the upside to have a higher level of income. Our goal is to have returns be a combination of some dividends, some options premium, and then some of the upside. And so it's about
creating total return with three buckets of return. Now, there is never a free lunch and you're going to get some of the upside of the market through a cycle for that options premium that burdenhand today, but that balance is not actually something that is by accident, is very intentional. It's very intentional to have that type of balance. In addition, we're not looking for dividen paying stocks, David, We're actually
looking for stocks that are just high quality names. Because when the market sells off, high quality named with great cash flows and great franchises and great businesses tend to go down less and you tend to see that like we saw in twenty twenty two, fourth quarter of twenty twenty five, first colarre of twenty twenty five, for that matter.
Finding a way to help buffer the downside besides options premium has always been on north Star, so JETPY yields eight percent, right and jep Q with ten percent all right, So I have been one of my ETFs to we do twenty six ETFs to watch in twenty twenty six. I think you have a jpmmorder one on there.
I think it's Jphy, but one of mine is c Aie. You may have heard of it. You probably heard of it, but for people listening who probably haven't it's the calum most auto callable ETF. You practically need a PhD to understand how these things work. But at the end of the day, it's a fourteen percent yield and that is pretty appealing. You just said people love income, so we call this derivative income, and derivative income is a real
hot area of ETFs. It seems like auto callables might be a threat to the option income market that you are like the king of. Do you see it as a threat or is it.
Going to be more more niche So I'm not sure I'm the king of anything, but what I would say is when I think about the autoclable market, auto calbs, auto callables have been in the wealth management channel for years and years, and they've traditionally been done on an index, a group of indices, a single name. And I agree with you as far as how you said. It not me that you need a PhD to understand it. Understanding what to expect, why to expect it.
Is really really important.
You just can't look at the headline yield, Eric, I think you have to look at you know, are they using leverage?
What is the index? You know? Where do is?
Where is the exploding downside kick in you know, the transparency, the liquidity, the issue or the counterpart, the operational complexity. I think there's just a lot there to unpack. And for those people that do have the PhD and are willing to dig deep, I think that it is an intellectual, intellectually honest way of investing. But I'm not sure if everyone has done the work. And so it's about education.
I think one of the things that we've done at JP Morgan, I think better than most is we help people understand what to expect and in what market, what would be a good market, what would be a challenging market, will be a baseline market. And I think that that's going to be important to the auto callable space moving forward. And I know you watch filings as the rest of your team. It seems like everybody in their mother is launching an auto callable strategy. So I think there's going
to be a lot of education necessary. I think we did a lot of the heavy lifting and the driven income space. A lot of people are in our coattails on It's me interesting to see how much education is needed and actually happens in the auto callable space.
Yeah, just to comment for it as a to you, Dave, is that there are forty autocollable ETIFT filings and there's like twenty on the market, so it's no secret. Because of the Calamost success, the industry is seen like a possible hit category, so we're going to see a lot. I think CIA is a responsible one. It's very diversified with like fifty different swaps in there. However, I do
agree it is complicated. You have to do your due diligence and now they're going to come with like single stock autofolbles and as usual etif industry is going to go a little wild. See, you got to be careful here.
So if we get back into the actual income, I did want to ask, when you're managing the portfolio, when we're in environments with volatility spikes, how do you adjust strike selection or timing for covered calls, just to help kind of manage that downside risk.
Sure, So you know, my background is over thirty five years investing in equities and equy options, and one of the things that I've learned is that for portfolios stocks.
Volatility is the enemy bond.
To make cases, volatility as the enemy because credits bread is widen But the fact is is every strategy that I manage has volatility as a tailwhend it's a benefit. So when volatility goes up, we're going to do two things for our investors. One, we're going to generate more income. Most people like that. The second thing is we're gonna sell an option that's farther away from where we are,
giving them more potential upside. So having that balance of upside and income, as we highlighted before, is very important to us. So when you put a strategy like JETPI or JEPQ in your portfolio, it acts as a implicit diversifier because volatility is its friend, or other parts of your portfolio used voltility as its natural born enemy.
I have a question on the naming of it. You know, I'm really fascinated by names. Over the years, We've seen some ETFs try fail, they resurrect it, we call it the Lazarus list. They try it again, it fails, and then someone just like renames it, and all of a sudden it's a hit. I think think slice spread work like this one. Like they couldn't sell bread until like wonderbread came along. You if they google that. But there's a whole story about how just labeling things sometimes is crucial.
This used to be covered calls. There's a lot of cover quality tfs. They existed for a long time, and then you guys come in. You call it equity premium income, which I always thought was like the winning the Pooh and the Tuxedo. You know, it's like an it's a more of a fine name for covered call. How crucial
is that to the strategy? I mean he thought about that at all, because it seemed to the Other thing is your timing was good, because twenty twenty two is when things got volatile and rate went up and the growth stocks really got hit. But what do you credit to the reason you were able to do it and not the cover call people before you?
Sure?
So, you know, as far as I'd love to tell you that Jeffy was a you know, instantaneous success, we actually launched it first in twenty eighteen. Is a mutual fun and we had modest success. And then the ETF team and I collaborating this said would you ever be interested in running an active ETF on the back of
James's success with JPST. I said, absolutely, if I can run, if I could ride James, this cotails done, and so we in twenty twenty we launched JETPY the ETF And what I think made us different was not that we didn't call it a cover call strategy, but rather we help people and what we highlighted earlier how to use it and what to expect. You know, in a traditional cover call strategy, people start talking about how the sausage is made. I buy this and I sell this, and
they get into the weeds. Nobody really always wants to know how the sausage is made initially. What they really want to understand is how do I use it and how can it help me? So we always led with a high quality.
Group of stocks.
It's gonna throw off seven to nine percent distributle income that incomes be paid out monthly and over timing you get some of the upside of the market. And we are very thoughtful in the activeness of our long portfolio because if the market would ever sell off because we wanted in twenty twenty, don't forget, we would expect these high quality names to hang in.
Better and once you know it.
In twenty twenty two, the market's hold off and the strategy was only down a fraction of the overall market. But that was you know, it was not something that we hoped would happen or expected to happen. It was just building it in case that were to happen. So I'm not sure if you call it call overriding or driven income or covered calls. It's what really brings this to I think the success was helping people understand how
to use it. And the other thing I'd say, Eric, is you know when you think about covered calls, many people say I'm going to buy a portfolio of twenty names, I'm gonna sell options on all twenty names, and then two weeks later, some chunk of those stocks are up a lot, and you're like, man, I hope that stock doesn't go up anymore. You start rooting against your favorite
stocks going up. So we never had that approach. So we always had options at the index level, so we would actually get the income by removing beta, but never having our favorite stocks taken away from us and being left with the losers and having our winners taken away. So I think the approach that we first took was what is the client experience we want them to have?
How do we want to build this strategy and actually try to figure out how many different environments can the strategy work pretty well on.
So in covering active, one of the things I've been tracking is sector concentration, especially with tech. And so if we move over to jet Q, how do you manage sector concentration risk? You know within that covered call framework, you know, especially with a tech heavy market like the Nasdaq.
So whereas the S and P five hundred is concentrated, the NASAK one hundred is really concentrated. So to try to be that different from the NASAQ one hundred is really really tough to do. So with jet Q, our long portfolio is going to be similar to the NASAQ one hundred. It's going to have let's call it two to three hundred base points of analyzed tracking R modest under and overweights, a little bit out of benchmark. But it's going to be stocks that could be in the Nasdaq.
For example, as you know, Walmarts added to the NASTAQ one hundred, names that could be the NASA one hundred. We're never gonna go down in cap or things that are just micro cap. We're gonna own up that is either in the nasadack or could be in the Nasdaq. But once again, the activeness of that long portfolio helps modest it helps create most alpha. We expect somewhere between you know, seventy five to hundred bits of alpha par animals. Again,
it's unique, it's differentiated. We're not sure anyone else is doing a Nastak one hundred portfolio that's active. The options that we do are always going to be out of the money, and the concentration we we you know, we try to you know, it's there's no getting away from the concentration, but we try to manage the concentration by having most over and underweights based on the stocks that we like.
A little bit more than others.
So we'll be modestly overweight, you know, let's call it stocks that we think have a better cash flow and better return.
Profile, lower evaluation relative to others.
You know, many people say I have to outrun the bear or as opposed to outrunning you, we just think we have to actually generate modest out above the benchmark, and the options that we're doing are on the Nastok one hundred, and as such, we want to.
Make sure we're not that different.
Because you are going to sell options that are going to have exposure to a highly concentrated portfolio as well.
David, And since I also cover mutual funds and you know, I'm always looking for what are the benefits of mutual funds over ETF's capacity is kind of the one thing where ETFs can't close. And so I just want to ask, you know, can the strategy get too big? You know, are you ever concerned about capacity?
I worry about everything. I'm paranoid about everything.
But I would say the bar for us at JP Morgan to launch a strategy is we have to take the approach that what if we're lucky enough to have success. And when we go to these conferences, and there's conferences all over the country, you know, with lots of ETF providers, many of them have the approach of you know, that would be a Champagne problem, and our approach has always been,
O would be a champagne headache. As soon as you have to change your investment process to actually solved for our capacity problem, you now have changed that experience of your client, that predictability of your client. You can't have a small cap strategy, Sea, I'm gonna start adding MidCap. You can't change what clients have bought and expect from you. So when you think about the S and P five hundred,
it's pretty crazy. Three point two trillion trades per day of notional and let's just say you take half of that out in seried options, it's still one point six trillion the options that you know, we started one of the very first hedge equity strategies in twenty thirteen. Back then the s F YOU one hundred only traded five hundred billion, which is pretty big at that point too. So those the options in the index have drawn even faster than the drind of income, the hedge equity the
buffer strategies by significant amount. And when you think about the Nasdaq, the Nasdaq trades over five hundred billion per day. So doing options over multiple weeks, because we ladder and stagger our options, not having all of our eggs in one basket, we think help soften the two big answer. But if you ask me, would I like to launch a highly concentrated small cap drive income strategy. Absolutely, just not an an ETF.
This is a good segue, is our last question for you, and then we're going to move over to bonds. So equity primum income, as I said, is a great name. And now you've got a franchise. You know, once you got a hit product, we've done study after study. If you have a hit, you better put out sequels. It's like the movie business. You know how many Iron Man movies are like four? You got JETPI, then you rolled out Jet Q. What's next, Like how far can you
take it? I know capacity is one concern, what about some more let's call it like volatile areas. And I know you guys don't do anything in crypto, although the world changes pretty fast these days. But I think like a diversified crypto equity premium income would make sense because it would be like diet crypto. You know, you'd have like the income and you'd select the more defensive crypto.
And it seems like you could almost sanitize that experience for people with this strategy, and not just crypto, but other asset classes. It maybe international.
So we've never been a meet too firm.
You know.
We launched Jeppie because the income in the marketplace was near zero.
We felt was that we could deliver.
High quality income distributed monthly, and that's where Jeppy was born. And when you think about income oriented strategies. There's a gap, a massive whole no tech. There's no tech that actually has yields. So we launched JETQ to fill that hole for those dividen oriented investors or those folks that wanted tech exposure but could there was no income in tech, and so that's kind of where JEPY came from and where jet Q came from. Now offshore in our use this world, we actually do.
Have a global JETPY.
We also have filed for European JETPY and we expect that to come to market, you know, early twenty twenty six. So we're always looking for those things where there's client interest and demand. What I would also say is when you talk about crypto and gold, I mean Warren Buffett has never been a gold fan because he's like, I can't own something that doesn't have yield. If you created a gold overright strategy, you may even get.
Warren Buffett to buy.
So where's the viiling.
Well, we'll talk to our brethren and fixed income currency commodities on that one as well. The other thing I'd say is there are many people like you folks that are you know, you like what we do in JETP. You like the return profile JETPY, but you don't need or want the income yet. And so about in August, we launched a strategy called joyt I will joy to your portfolio. The idea here is it's called the JP
Morgan Equian option Toll Attorney TF. So when you have additional investor that actually takes a distribution only to reinvest it, you know that actually means I'm going to give you money only to give it back to me, So maybe I shouldn't even give it to you.
So this is strategy.
It keeps its options premium within the ETF so there is no movement between that. So it doesn't have a taxable event from that perspective, or we don't anticipate to have a taxable event, and enables you to take out money when you want to, but just get the same return profile and the lower vall very good, sharp ratio type of strategy and I encourage people to kick the tires on it.
Great, So thank you, Hamilton.
Now time for bonds, James, exciting, right.
We should have started with bonds. I'm just kidding.
No, sorry, I it's just the inside joke between me and Katie when she's like, oh, we got his coat of fixed in color.
I'm like, oh, I'm just kidding.
I love bonds.
We'll make it as painless as possible for you.
So I think to start, give us just kind of an overview what the investment process is for JPSD.
Yeah. Sure, And to be you know clear, JPST is run off of an ultrashort platform that's one hundred and eighty billion dollars run by Deve Martuccio is here in the room with us. JPSD is just the flagship ETF at thirty five and a half billion. Now, so this space we've been managing money going back to two thousand
and four. We had an institutional process in place that I'll take you through in a second, and then we launched JPSD off of that platform in the ETF Rapper to reach the advisor community and we've had great uptake there. But from you know, our institutional experience, the way that we manage money is really no different than anybody else. I mean what I would say is, you know, marriage of the top down macro outlook bottoms up security selection. Yeah,
specifically about security selection. You know, what we do is on a monthly basis, have a macro meeting where we have our entire team, the whole portfolio management team, ten portfolio managers globally or in this meeting, our CIO John Donahue. You know, we'll have our our credit analysts, even some of our client facing folks, risk management teams all present.
There will debate markets obviously in the outlook, and then we'll come away from that meeting with an eye towards adding and reducing interest rate duration, credit spread risk, what sectors do we want to be doing that in and then JPSD. Now, the ultrashort space is a little funny. There's only one qualification that you need to meet to be considered an ultrashore fund, and it's a weighted average
interestraight duration in one year or less. So you could buy credit as long as you'd like, as long as you head you back, or as long as the interestraright duration is shorter. We've limited ourselves to five year maturity, so we're trying to pick the points along the curve that we want to be then buying those securities. When we come out of that meeting, though, with that sort of guidepost, we go back to the desk and then we start doing our relative value work on the underlying securities.
The way that we work though, and I mentioned risk management at the beginning of US and being a part of global liquidity, one of the best practices that when Dave was building out the process we wanted to employ in this space was to leverage the a proof of purchase list that our money market funds use, So we just can't buy any credit into the portfolio just because we like the name and it looks cheap to us and needs to be fundamentally scrubbed by our twenty plus
credit analyst team. When they're fantastic, they understand what we're trying to do here with a lower vowl approach, they'll deem it appropriate or not to go on to that list, and if it does, they'll sign it an interrontal rating. Then that will drive what our maximum concentration is and where do we want to go on the curve in
that name. Once we take that list and we take that and we marry that up with what our macro outlook is, then we'll go on and we'll do relative value work using those individual credits to try and source value in the portfolio. And we're very active in doing that right, So you'll constantly see us swapping out of a short bond and giving credit to buy a new issue in the two year, three year, five year part of the curve if we deem an appropriate for our outlook. But it's very actively managed.
So ultra short strategies do walk a fine line between higher yield and preserving liquidity. How do you calibrate portfolio risk when spreads widened but liquidity titans?
Yeah, and I guess this is what Eric meant by bonds are fun because you know, I don't want to geek out on bond terminology, but really the calibration, the metric that we use is spread duration, right, So a bond portfolios sensitivity to wining or tighting and crowd spreads. And I just mentioned that to be an ultra short fund you have to have weighted average duration in one year or less. Your spread duration can be as high
as you'd like. Right. For us, we've managed in a range of a half a year to one and a half years. And that's not to say we can't go higher. But even at the time where we saw spreads the cheapest in the last twenty years, we still just took it up to about a year and a half. And that's just given you know, how we view the world and wanted to be that conservative next step out of cash, so that spread risk is going to be one of
the levers that we pull. The other thing I mean I mentioned the approve a purchase list and the individual credit sizing. That's very important to us. We want to be very granular in the individual exposures that we had in individual credits, so you typically won't see us own much more than one and a half to two percent any given name in the portfolio. And we don't want to just bullet that at one point, meaning we don't want to just buy that entire concentration in one, two,
three years with just one bond. Further out the care we want to try to ladder it so we have some sort of natural rolldown, natural liquidity, and that's you know I mentioned before. Our priorities are capital preservation, liquidity, and then return of or pickup in return over cash
and higher yields in that order. And to achieve that, we want to make sure that we have a portfolio that's liquid not only in the marketplace, but also liquid through the natural occurring maturities and the portfolio of securities rolled down.
Yeah, as you were talking, I got flashed back to twenty twenty in March where there was a couple of ultra short ETFs. I don't know if it was you, per se. I think it was a blackrock product, but they had some deep discounts temporarily. I mean the whole
market did, honestly, even TLT had discounts. But this is something that happens seems like once every five years, where just like the sky falls and how important is that or how much is that on your mind when you're thinking about these bonds, because I have to think the temptation to just.
Go a little further and get a little more juice is pretty strong, right, And within global liquidity, we have our own dedicated risk management team specific to the products that we manage that are going to keep us honest and keep us true to you know, the approach that we've agreed to to manage this product, which again is with an eye towards low volatility, and we want clients
to be able to sleep well at night with this fun. Right, you shouldn't have to go and explain to your clients why your ultra short fund is trading at such a deep discount or at a loss, and so I think, you know, as far as how we approach things have kind of gotten into the granular sizing the high quality nature of the approved for purchase list. I always like to say, because of that list, we're already starting with.
A much higher quality subset in my view, than the market portfolio that's out there that's available to us. But again, active management you get, you know, the process that we are kind of covered here and pulling the levers of liquidity that you know right now, I'll give you an example. We're looking at a market where spreads, as we all know,
are approaching all time tights. If they're not there in certain parts of the curve, we don't know that the FED is cutting rates too more dramatic, too much more dramatically. We think still we get one or two more cuts this year. But that being said, that kind of gives us a little bit of pause for extending the portfolio too much, and so we start to pull back on that lever and maybe our spread risk has been anywhere has been really run in the lower half of that
range that I mentioned before. If we were to see widening that we'd actively move out the curve. But to your point, we always keep those those instances in mind obviously, of you know, you never know when you're gonna get hit with an air pocket of vol and maybe liquidity drives up a bit or becomes more challenge. I think March of twenty twenty was certainly, you know, a multi standard deviation event that it was probably about as bad
as it gets when it comes to liquidity. And obviously the FEDS put some facilities in place now that weren't in place before that will probably help to sort of cap the widening on credits spreads we would think going forward,
and maybe reduce some of the tail risk. But yeah, certainly we want to keep an eye on that, and that's why I mentioned before, we want to build that into you know, build that ladder into the portfolio, have those naturally occurring maturities that then can provide liquidity if we're in a market where all of a sudden liquidity becomes challenged.
So we're talking about liquidity, but what about just in general rising or uncertain rate environments. How did duration and floating rate exposure decisions kind of change inside your bucket?
Yeah, and I think it's surprising that people when we go in to talk to them about the fund and show how active we are and managing the duration of the fund, when I've already stated the range is just zero to one year at the portfolio level, right, But that can drive a lot of alpha relative to competition or two indicase that are more static. So we're very active within that range. I'd give you an example, like in twenty twenty two, obviously the FED was, you know,
hiking rates pretty dramatically. We brought the portfolio way down the curve. We were running about a quarter of a year duration. We were outright short two year treasuries in the future market, and we had about ninety percent of the portfolio almost maturing inside of one year. We looked a lot like a money market fund in that instance. It's not our goal to be in money fund, but
we wanted to protect again principle in the portfolio. Our return was just over one percent for the year twenty twenty two, one point zero six percent to be to be exact, versus the egg being down thirteen percent. So not bad. I mean, obviously tough to keep up with cash, and in that instance, I don't think anything really outperformed cash, but you know, certainly we were able to protect the majority of the portfolio. Now today the opposite is true.
You know, we are running much closer to our maximum duration about three quarters of a year right now. We have more of the portfoli out the curve right now, probably about fifty five to sixty percent maturing inside of a year, which is still a little bit elevated. But again in the market that we're in right now, we don't know that we necessarily get a massive benefit from you know, rates moving materially lower in the near term here, or spreads moving materially tighter, and so we're going to
be a little bit more cautious with big picture. We have moved back out the curve very actively, and so that you know, we're going to pull that lever again, just like we mentioned the spread risk before. But obviously this is more focused on interest rates and at times in a twenty twenty two environment, for example, you know, I think we had upwards of thirty percent floating rate, you mentioned that. Right now it's more closer about ten percent, maybe a little bit more, and that's more of an
income play right now. Right so if we can get our state at alpha goal for JPSD is plus forty to sixty basis points over cash or over a money market fund. We use a prime money market fund as the benchmark for that. When we look at floaters right now, there are certain issuers where we can get a carry of forty to sixty maybe even a little bit more over the sofa rate or the cash proxy. So you know, for us, that makes sense to kind of clip that
coupon and it's a good income play. But obviously right now we're leaning more in the direction of having a little bit more duration on so the floating rate exposure is a little bit lower than it was in a period like twenty twenty two.
So Dave does great job covering neutral fund flows. And one of the things that blows my mind is that money market mutual funds took in something like seven to eight hundred billion dollars last year. So everyone is flipping out that ETFs took in one point five trillion, and yeah, that is a lot, but money market funds did half of that. I mean, that's a lot of money. How much of that? Like does that are you?
Like?
Does that hurt to see all that money go? Because that's I feel like you could pick some of that off. And well, I think is that who you're selling to is to say, hey, look, I know you want to part cash. You don't need a dollar nav it's not that big of a deal. Come up, I'll give you a little more. Or are you selling to people who just are outside of the money market world completely?
No. I think it's a mix of both. So I think the majority of the flow thirty five billions since twenty since we launched in twenty seventeen, has been folks moving out of cash that are looking to pick up a little bit more, you'll strategically, right, so maybe you know what we say are recommended investment horizon to be in this fund is a minimum of six months, right, so at least six months, maybe six to twelve months.
You know, if you have a known cash need inside of that period and you have no stomach for vall, you should really be in a money market fund. So we're not going to you know, sell against against those clients, but if you have cash, you can segment and move out the curve one step. Certainly, there's this opportunity to pick up what can be meaningful, right relative it doesn't
have to be in that forty to sixty range. This past year is closer to eighty basis points overcash, So you know, it depends on the market that we're in, certainly, but there's an opportunity there, and I think again that's where the majority of the flow has come from. Now, we've seen times where people will use JPSD as sort of importent a storm of volatility maybe coming down the curve in twenty twenty two to sort of shelter away from duration. That's not a trade that we see right now.
But you know, I think you mentioned that money market flow. We were talking about this in a breakout earlier. You know, if you normalize money market assets relative to the market cap of the SAP five hundred right now, we're actually a little under where we've been historically. So we're not surprised to see structurally cash flowing into money market funds.
It makes sense to us. But surprisingly given all that flow, JPSD had its best year for flows last year as well, So we were up seven and a half billion net, just shy of ten billion gross, and that was a record year for us. So, you know, does it hurt maybe a little bit but certainly we think we benefited as well.
So looking ahead, how do you see the role of liquidity focused strategies evolving as divestor demand shifts and markets change.
Yeah, I mean I think so far we we've seen that and we've captured you know, that segmentation that we just mentioned, and I think maybe the next trade as we're here talking about the outlook for twenty twenty six and a lot of the questions that are in the marketplace right now, whether it's fed independence a minute, you know, the administrative policies coming out of Washington, tariffs, inflation, inflationary impulses from tariffs potentially, you know, I think there's still
is going to be you know, volatility this year, and maybe the next source of cash coming into JPSD is more people looking again to shelter themselves from VALL. But I think big picture will continue to see folks moving out the curve, and so you know, I think the role continues to be that next step out of cash high you know, high quality, low VALL and then again sort of import in the storm of volatility. If if folks are looking to reduce duration, reduce exposures elsewhere in
the portfolio. I mean, we've seen a lot of clients take risk off elsewhere in portfolios, parketing JPSD and then reallocate when the time was right for them. But I think you know, there's a lot of innovation going on in our space. There's a lot of competition coming, so we want to stay on top of that. So you know there are we're always we're constantly looking at that thinking about the potential for new products, and so you'll continue to see us discern that.
I want to jump in and ask, this is something we study all the time. Because active finally found its sputting right, and so we said what happened? We studied, We had all kinds of theories because organic flows. You guys have got organic flows. It's hard. It's like you crack the code. I think I've figured it out. So we have this chart. We look at active share and fee on you can picture a chart right, and if you draw a forty five degree angle between those two,
the stuff that's below that line tennessee outflows. So if you have a lot of beta, so low active share and a high fee, those are the mutual funds that tennessee outflows. If you have a higher active shore, I mean a lower active share, but a low you do fine. Jetpy's kind of in the middle but above So like you have a sixty five percent active share, thirty five
basis point fee. We don't do it for bonds, but I'd say eighteen BIPs for JPST given all you just mentioned with all those managers, that's a lot of active for eighteen BIPs. And so how important is fee? We used to say that JP Morgan to get that brand name it something around Van Guardian. Fee was really half
the battle. Performance is the other half. But that's a pretty big deal for an advisor to be like, Hey, tell their client I got you JP Morgan, and you know they're all cost obsessed and they got you for a price that feels institutional. How important is that to this whole thing? The data does bear it out, it seems like.
So when we first launched jetpi in twenty twenty, our goal was to say, we want to hope people like what we do, how we do it, and what they're going to get, and not let fees get in the way. So if you actually look at where jepuis priced in twenty twenty, it was by far the lowest in the category and the competitive landscape all came to us at that level.
But I'd also say.
And you know this quite well, Eric, you know, the barriers to entry to an ETF right now are near zero.
Right you got one.
Hundred grand and an idea, go to a platform and you can launch it. But you don't have a cap markets team, you don't have market makers that are gona support your product. You're not gonna have that middle office back off as that infrastructure. You're not gonna have investment specials to have talked to you about what to expect. So having that JP Morgan brand is almost, I think very much a good housekeeping silk approval, which I'm pretty
blessed to have. In addition, you know, doing something that once again is a good value. I mean, to do all of this stuff yourself, watch options, expire, trade as many bonds as James trades, to actually make sure that your your distributions happen on time, to make sure that you're having all of that together. I mean, where else can you get you know, twenty analysts with one ninety million dollars research budget and five thousand management meetings per year.
For thirty five BIPs pretty hard to get.
So I think it's very much a value proposition. And if you look at actually in the driven income or even the headge equity or the buffert space, you know, I would say, when you look at that line that you just talked about, I would say, a good chunk of the strategy that use derivatives. If not, you know, probably over seventy five percent are either passive or they're
active on the option side, not the stock side. And so I think thirty five BIPs, JP Morgan, that infrastructure and that support you get from our client advisors, our investment specialists, our portfolio managers. I'm not sure why we're given it away at thirty five BIPs.
Are so, I mean, we have the mutual fund share class. A lot of people listen to this podcast are in the mutual fund industry, so a lot of them are. Did you know that there's like five hundred mutual funds that don't have an ETF yet, and so there's plenty of people thinking about and you guys are like the shining models for like how to succeed. So it was actually firms, yeah, firm, sorry, five hundred firms out there,
and they're like, how can we do this? And so you guys came at the R six class of your roof for fun, and I just think it was a brilliant move. You know, sometimes if you tiptoe, you try to like baby step in, it's you just kind of like rip the band aid off. Came in at the R six and it worked out well.
And it's not just coming at the R six. I mean we were all in, James, you launched in twenty seventeen, right, so we were all in and fully committed because the rapper does have benefits, you know, fees, transparency, liquidity, tax efficiency. I mean it's just a better mouse trap. And once we were you know, once we had the opportunity to deliver that better mouse trap.
I mean we were all in from the top down.
Error. All right, you're gonna love this question. It's starting to feel like a commercial for for you bows and but hey, look you had a good year.
What can I say?
I did the numbers and this is about four or five months ago though, so, but I'm sure they're in the ballpark. I was stunned.
We have this new league table.
We can track the market share of anything, right, So I was looking at active total active assets in the US mutual fund plus ETF, and I knows JP Morgan in the past like five years had passed pimpcoh DFA, and then most recently tro Price to be fourth. That would be behind Capital Group, Fidelity and Vanguard. That's a lot of people to pass. And you took in four times more cash than any other active manager in the past year. That's crazy. So when I go out on
the road, I'm like, you should study these guys. They clearly know what's going on.
You don't need to say it to anybody.
But half to battle is somehow stopping the bleeding in the mutual funds Because some other companies I won't mention their names, they'll have a lot of ETF inflows, But then you look at the mutual funds and it's almost equal outflows. You guys, the reason you're so net positive versus the peers is you don't have the bleed on the mutual funds. Why how's that work?
I wish there was a simple answer.
I would say that you know we have You know, if you help people understand what you're doing, why you're dealing, what would be a good environment for your strategies. What would be a challenge environment for your strategies. I think, yes, staying power. I think there's obviously, as you know, Eric, there's four p's people, process, philosophy, and performance. You know, I would say the landscape for years was look at
my strategy and it's great performance. But if you don't understand the first three pre's, that performance turns you sell it. It's not sticky. We've always led with Look at our people here at JP Morgan, look at our philosophy when it comes to how we invest, and I mean James and I spent a lot of time talking about philosophy, how we add things to our portfolios, and how we think about risk and how we think about return and think about the process. I mean, if you have an
unpredictable process, you become uninvestable. So we spend a lot of time on the first three piece and the fourth P is an outcome, and obviously you have to deliver on the fourth P. But if you'll lead with the fourth P, acids are not sticky and they're transient.
I think in our space, to be honest, I mean we have seen our mutual funds have some draw down and obviously migration towards the ETF. But I think by and large, there's still clients that, especially on in the institution of space, that are still have not you know, flipped over to ETS and are still working on whether it's ima changes or board changes, and they're just obviously slow to move. So there are definitely still clients that
have an appetite for mutual funds in our space. But we have seen, you know that now the transition really has been especially on the advisor side, you know, to adoption of those the ets obviously, and.
At this point there's still some people that can't own ETFs, so those assets and mutual funds are probably sort of sticky, and given the massive market appreciation over the last three, five, ten years, there's many people that also don't want that tax of selling the mutual funds. So I would expect, you know, one person's opinion, you know, mutual funds to be you know flat plus mi us a little bit and ETFs to be the growth engine for as the managers in the future.
Eric, Unfortunately we need to end here, but this was great, Hamilton James, thank you so.
Much, Thanks for having us, for having us, thanks for.
Having us here. Actually too and Eric. Thanks for reading my host on this episode. My pleasure was fun. I also want to thank our listeners. If you like the episode, please subscribe and leave a review. If you'd like to see more of our research on the terminal, go to BI Fund Go for Fund and Active Research, and b I E. T F Go for ETF research Until our next episode. This is David Cohne with Inside Active