JPMorgan Stock Pickers Win Investor Cash to Buck Indexing Trend

(Bloomberg) -- Don’t tell JPMorgan that investors want nothing to do with mutual funds run by stock pickers.

For the third consecutive year in 2014, the New York-based bank attracted more net new money to its actively managed equity funds than any of its U.S. mutual fund competitors. In a year in which larger rivals such as Fidelity and American Funds suffered redemptions from active stock funds, JPMorgan gained $18.3 billion, according to Morningstar.

The bank bucked the trend toward indexed investments with strong performance, especially in funds that buy U.S. stocks, combined with a concerted plan to woo financial advisers with a soft-sell effort that emphasizes education rather than specific products.

“Their approach is smart,” said Lawrence Glazer, a managing partner at Mayflower Advisors in Boston, which oversees $2 billion in client assets. “They provide support without being too sales-ey or gimmicky.”

Active managers are on the defensive after just 21% of funds that pick U.S. stocks beat their benchmarks last year, Morningstar data show. Investors responded by pulling $98 billion from active domestic stocks funds while adding $167 billion to index funds and exchanged-traded funds.

STRONG PERFORMANCE

Boston-based Fidelity, with $1.25 trillion in stock and bond funds, had redemptions of $21 billion from active equity funds, according to Morningstar. American Funds, a $1.17 trillion unit of Los Angeles-based Capital Group, had outflows of $6.2 billion. JPMorgan had $263 billion in U.S. mutual fund assets as of Dec. 31.

JPMorgan got a boost by having a lineup of stock funds that beat the competition. The bank’s 10 largest funds with a five year record beat 82% of peers over that stretch, according to data compiled by Bloomberg.

Some of the strongest performance came from funds led by one manager, Jonathan Simon. His $16.1 billion JPMorgan Mid Cap Value Fund topped 98% of rivals over five years; his $10.3 billion JPMorgan Value Advantage Fund beat 95% in the same period, according to Bloomberg data.

The mid-cap fund has delivered “stellar performance,” said Cristopher Moran, a portfolio manager at EP Wealth Advisors in Torrance, Calif., which has owned shares of the fund for more than a decade. Moran particularly likes that Simon has minimized losses in falling markets.

UNREALIZED GAINS

Moran said he was concerned that since the fund has had good results over time, many of his clients are sitting on large unrealized capital gains. “It’s a high-quality problem to have,” he said.

JPMorgan’s target date funds, used by investors saving for retirement, have helped attract money with better than average performance. The team that runs the funds won top honors from Morningstar for 2014 in a category called allocation funds.

The bank hasn’t done as well with funds that buy international stocks. The $3.5 billion JPMorgan International Value Fund trailed 80% of peers over five years; the $2.5 billion JPMorgan International Equity Fund lagged behind 77%, according to data compiled by Bloomberg.

Andrea Lisher, head of North American mutual funds at JPMorgan, said 2008 was a critical year for the bank’s efforts to attract money. While stocks tumbled and investors bailed out of equity funds, JPMorgan began a campaign urging people to put more money into stocks.

EVENTUAL REBOUND

The call wasn’t a bet stocks would rise immediately, said Lisher. Instead, it was a recognition that without enough money in equities, investors would miss out on an eventual rebound.

“We got a lot of tomatoes thrown at us,” Lisher said. “It wasn’t a message people wanted to hear.”

Other fund companies have tried similar strategies without much to show for their efforts. In January 2010, Franklin Resources launched a campaign called “2020 Vision” to convince clients that the long-term future for stocks was bright. Over the past five calendar years, the San Mateo, Calif.-based company has experienced $13 billion in redemptions from its U.S. stock mutual funds, Morningstar data show.

MARKETS GUIDE

Glazer, the Boston-based adviser, said JPMorgan’s presentations are unusually effective. He called the bank’s quarterly Guide to The Markets, “the best thing any of the fund companies produces.”

The guide, a mix of charts and statistics accompanied by audio commentary, is distributed to 100,000 advisers in the U.S.

Stephen Lovell, an adviser in Walnut Creek, California, who uses the bank’s education materials on his radio show, said the guide has helped make JPMorgan a familiar brand in the financial community.

Cogent Reports, a Cambridge, Mass., research firm, found that 29% of the advisers it polled between November and January used JPMorgan funds, up from 21% in 2012.

Lisher said the “vast majority” of the bank’s equity money comes from third parties such as advisers and brokers. The rest comes from the JPMorgan’s own sales channels, including its private bank.

JPMorgan has gained traction among advisers even as the bank itself has had its share of bad publicity. In 2012 a trader known as the London Whale lost at least $6.2 billion, an event that triggered fines and critical congressional hearings.

Robert Foley, an adviser in Tustin, Calif., is aware of the occasional bad press. Still, he uses JPMorgan funds. “I am confident they are good custodians of my clients’ money,” he said.

Lisher conceded that in the current environment active funds remain a tough sell. “We have to work harder to prove we are adding value,” she said.

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