ETF offering in Asia ramps up

As many asset classes suffer poor performances, special products are being introduced to the Asia market, such as ETFs, to find extra yield whilst suppressing volatility

Largely unnoticed by the market, J.P. Morgan Asset Management (JPMAM) has quietly launched its exchange-traded fund (ETF) business in Asia.

The launch comes at a time when ETFs are expected to continue their strong growth as investors reeling from the poor performance of most asset classes in 2018 switch to investment strategies that provide some relief from the heavy burden of asset selection.

In an interview with The Asset, Sean Cunningham, executive director and head of ETF Asia for J.P. Morgan Asset Management, says: "The end of last year seemed like an appropriate time for us to consider what the strategy in Asia given the phenomenal amount of trading that is going on in Asia by Asian institutions cross border into Europe and the US."

Before joining JPMAM in September, last year, Cunningham spent the previous 10 years with Blackrock, four of those years in Asia, where he played a role in building that firm's regional franchise. In his newly-created role, Cunningham will be directly competing with his previous employer as he builds JPMAM's ETF business in Asia.

Cunningham's role encompasses all aspects of the business from product strategy to integrating and leveraging the existing sales and distribution networks within JPMAM to build the ETF business in the region.

In terms of target clientele, JPMAM plans to start with Asian institutional investors who do cross border trading. However, the firm will also reach out to high net worth, private banking, and retail investors.

"It's really about Asian institutional investors that have the ability to do cross border trades, how we would position our range (of ETFs) as it exists at the moment both in Europe and the US to satisfy needs and challenges that clients out here in Asia face," Cunningham says.

In the near term, JPMAM is focusing on bringing its existing ETFs, particularly market-cap-weighted-index ETFs in the US and Europe to Asia for distribution to its clients here. At the same time, JPMAM is looking to list some of its ETFs in Asia, particularly in Australia, Japan, Hong Kong and Singapore.

"In the short term, we are focusing on the ETF range that we already have out there and that exist in the two global regions because that's where we built those platforms, and how we position those products in Asia. But at the same time let's have a look at the market as it exists in Asia and the local listing environment. Another opportunity for a firm such as our self to be able to launch products and position ourselves for the local listing environment," Cunningham says.

At present market-cap-weighted-index ETFs alone amount to US$5 trillion globally and the growth of this market is expected to continue.

"It's meaningful in terms of its size versus the market as a whole but we've yet to really scratch the surface in terms of where this will eventually grow. So, we feel that we have come to the market at exactly the right time," Cunningham says.

At the same time, there is also an increasing trend towards factor investing, smart beta, strategic beta and now actively managed ETFs that cater to special requirements of institutional investors where Cunningham says JPMAM is strongly positioned.

For example, institutions across the globe and corporates in Asia are facing the issue of holding huge amounts of excess cash balances in their portfolio for which they want to generate extra yield.

"With these really large cash positions, and in a rising interest rate environment they're looking to get extra yield, and to find that extra yield you go to the short end of the credit curve," Cunningham says.

JPMAM has an actively managed ultra-short duration portfolio that basically uses ETFs on the very short end of the curve, has an average duration of about six months.

"It's not necessarily a pure cash product but it is an alternative that gives you minimum volatility around the terms, in terms of capital preservation, and so on, but gives you added yield over and above other products out there in the market," he says.

Cunningham says JPMAM did its first trade in Asia for this product in Taiwan. The product however is popular in the US where it currently has US$4.5 billion in assets.

"We're only three months in, we did our first trade for a client in Taiwan for that product. And we think that going forward Asia is going to be a very strong contributor to the flow that we see into that strategy, whether it's in Europe or the US, because certain clients have a preference to trade one or the other," Cunningham says.

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