Smart Alpha portfolios are powered by the in-house research, multi-asset knowledge and experience of one of the world’s leading investments houses. Here, we look at the expertise that underpins these portfolios.
Forming in-house views
Bilquis Ahmed (pictured above) is part of the 82-strong team of career analysts whose in-depth research forms the basis of the investment process for the Global Research Enhanced Index (REI) Equity ETF in Smart Alpha portfolios. She has been at J.P. Morgan Asset Management for 22 years.
‘I cover 30 stocks in the European retail sector and have been meeting with the respective management teams for over ten years. I also speak to suppliers, customers and competitors to get a full view of the value chain.
I start with industry analysis: how big is the market in this sector? How fast is it growing and why? How fragmented or consolidated is it? I then assess the strengths and weaknesses of the industry players. All this allows me to form a view of who the winners are and who the laggards will be, informing our forecasts and valuations. We are less interested in the short-term, instead emphasising longer-term, structural earnings trends.
A good example of a stock I like for the future is in sportswear: we expect a very strong sustainable shareholder return from a high-quality company that is benefiting from the shift to ecommerce and their brand strength. It is the leader of the sub-sector on sustainability and, after years of mismanagement, is now seeing great improvements under a new team.
In contrast, one company for which my thesis is less positive is in the luxury goods sub-segment. The company has underinvested in its product range, marketing and stores; failed to participate in the trend for more casual apparel; and is struggling to keep pace with the mega brands. As a result, I prefer the sports/athleisure company.
Environmental, social and governance (ESG) considerations are fundamental to my view of a stock. For example, let’s look at two high–street retailers. One has already put in place sustainability goals and best practices, switched to fully recyclable packaging and announced aggressive goals for sustainable fabric use. The other has not and is yet to bear the associated costs. For the latter, I think this will impact future earnings.’
Harnessing research insights
Piera Elisa Grassi (pictured above) is the lead portfolio manager for the Global REI Equity ETF in Smart Alpha portfolios and has worked at J.P. Morgan Asset Management for 16 years.
‘With my team, I use the insights from Bilquis and our other fundamental research analysts to build and manage the portfolio. We don’t take large bets on individual stocks. Instead, we invest in a large number of stocks – typically around 750 – and take slightly larger positions than the index in the stocks our analysts like and slightly smaller positions in the ones they don’t. This allows us to make use of the full breadth of our analysts’ research without taking a large risk with any individual position.
Using Bilquis’ sector as an example, we have a larger position than the index in the sports/athleisure company, and a smaller one than the index in the luxury goods company – in fact, we do not hold it. But these aren’t big bets. We keep the size of our overall allocation to the retail sector, and to all sectors, very close to that of the index, so our returns come from our analysts’ research into individual companies – where we believe we have an information advantage – rather than from calls about which sector might do well or badly. We also keep our regional allocation very close to the index for the same reason.
As in Bilquis’ work, ESG is very important to both our research process and our portfolio construction – to the extent that we have explicit ESG exclusions in the portfolio. We don’t hold companies producing tobacco, thermal coal or weapons. When we identify an ESG issue with a company we do hold, then we’ll act in a hands on way. We work with our Sustainable Investing team to engage with the company and seek to drive improvement.’
Putting it all together
Anjali Grover (pictured above) is an investment specialist in Multi-Asset Solutions – the team that sets the long-term asset allocation for Smart Alpha portfolios and makes the tactical allocation decisions. She has been at J.P. Morgan Asset Management for three years.
‘My team has built multi-asset portfolios for institutions and professionals worldwide for over 50 years. We use our long-term capital market assumptions – our expectations for the return and volatility levels of markets and asset classes over the next 10 to 15 years – to set strategic (long-term) allocations that align with the chosen risk level of Smart Alpha portfolio investors.
If you choose a higher level of risk, you’ll have a higher allocation to equities, including the global equity ETF managed by Piera-Elisa and her team, to give you higher potential returns. If you choose a lower level, you’ll have more bonds, which offer a greater ability to preserve your capital.
Around this long-term allocation, we make tactical adjustments to manage risks or take advantage of opportunities in the prevailing market environment. For example, we could reduce your allocation to equities in periods when we expect stock markets to fall, or increase your allocation to European equities vs. US equities if we expect Europe to do better. Risk is carefully controlled to make sure the portfolio remains aligned with the level you have chosen.’
Bringing it to you
Once these positions are constructed by J.P. Morgan Asset Management’s experts, they are executed by the Nutmeg investment team. James McManus (pictured above) is Nutmeg’s CIO and has been with us for five years.
‘Once we receive the portfolio weights from Anjali’s team, our first role is to ensure they meet the rigorous suitability and risk criteria we operate for all of our investment portfolios. Smart Alpha portfolios adhere to the same risk and allocation limits as our other Nutmeg investment styles and are subject to the same daily oversight of risk. It’s also important to recognise that they have been designed to embody the same investment principles at their core: globally focused, diversified, transparent and low cost.
Once satisfied, we utilise our proprietary portfolio management systems to ensure that our client portfolios are aligned to these weights as efficiently as possible. Our in-house technology has been designed specifically to manage multi–asset ETF portfolios, focused on improving the investment outcomes for customers by driving greater efficiencies.
For example, our fractional share facility allows us to own portions of an ETF share, meaning no matter the size of your investment, your portfolio will be managed as effectively as possible. This also allows quicker dividend and income reinvestment, maximising the time in the market and making your investments work harder for you in the long term. Our systems also allow us to net trades across our client base, reducing the volume and costs of trading, whilst our expert in-house trading team work hand–in–hand with our investment team to ensure we’re always obtaining the very best possible prices for customers.
Smart Alpha portfolios are also subject to daily oversight from our investment team, who work with our partners at J.P. Morgan Asset Management to ensure portfolios remain aligned to their risk objectives. We take both a historical perspective and a forward-looking approach to quantify risk within our portfolios. Our team uses our own unique resources and industry leading risk systems to provide comprehensive historical risk reporting and forward-looking portfolio analytics.
With Smart Alpha portfolios we’re combining Nutmeg’s core investment principles, ETF and fractional investment expertise with the in-house research, multi-asset knowledge and experience of one of the world’s leading investment houses to offer our clients access to a different type of investment portfolio.’
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Forecasts are not a reliable indicator of future performance.