jpm merger arbitrage fund alternative ucits event
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JPMorgan Funds - Global Merger Arbitrage Fund
Alternative UCITS Retreat - December 2011
FOR PROFESSIONAL INVESTORS ONLY, NOT FOR USE BY OR DISTRIBUTION TO RETAIL INVESTORS
JPMorgan Funds – Global Merger Arbitrage Fund
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Investment Objective
– To provide a return in excess of its cash benchmark by taking advantage of the "deal risk premium" factored into the price of companies which are, or may become, involved in merger activity, takeovers, tender offers and other corporate activities anywhere in the world, using financial derivative instruments where appropriate
Investment Policy
– The Fund will primarily invest in, either directly or through the use of financial derivative instruments, a portfolio of equity and equity linked securities of companies that are, or are likely to become, subject to merger activity, takeovers, tender offers or other corporate activities. Issuers of these securities may be located in any country, including emerging markets
– The Fund may hold short positions (through the use of financial derivative instruments) in the acquiring companies where the merger is a stock deal, or use equity futures to hedge its market exposure
– Equity exposure may be achieved through investment in shares, depository receipts, warrants and other participation rights. Subject to the foregoing, equity exposure may also be achieved, to a limited extent, through investment in index and participation notes and equity linked notes
– The Fund will typically hold, directly or through the use of financial derivative instruments, gross long positions of 100% of its net assets and gross short positions (achieved through the use of financial derivative instruments) of 50% of its net assets. The Fund will not exceed gross long positions of 150% and gross short positions of 150%. The Fund will hold sufficient liquid assets (including, if applicable, sufficiently liquid long positions) to cover at all times the Fund's obligations arising from its financial derivative positions (including short positions). The net market exposure of long and short positions will vary depending on market conditions but will normally not exceed 130% of the Fund’s assets
JPMorgan Funds – Global Merger Arbitrage Fund
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Investment Policy (continued)
– Financial derivative instruments utilised by the Fund may include, but are not limited to, futures, options, contracts for difference, forward contracts on financial instruments and options on such contracts and swap contracts. Such financial derivative instruments may also be used for hedging purposes
– Fixed and floating rate debt securities may be held on an ancillary basis
– The Fund may also invest in UCITS and other UCIs
– The Fund is opportunistic and it may invest 100% of its assets in cash and cash equivalents until suitable investment opportunities can be identified
– Techniques and instruments relating to transferable securities and money market instruments (including, but not limited to, securities lending or repurchase agreements) may be used for the purpose of efficient portfolio management
– USD is the reference currency of the Sub-Fund but assets may be denominated in other currencies, including emerging market currencies, and currency exposure may be hedged
– The global exposure of the Sub-Fund will be monitored using VaR methodology
– All of the above mentioned investments will be made in accordance with the limits set out in "Appendix II – Investment Restrictions and Powers"
Please refer to the Fund’s prospectus for more information relating to the Fund.
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JPMorgan Funds – Global Merger Arbitrage Fund
Merger arbitrage as a risk premium
Increasing M&A activity
How to access merger arbitrage
The JPMorgan Global Merger Arbitrage Fund
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Merger arbitrage has proved robust through a variety of market conditions
2008 was the only calendar year with a negative return for Merger Arbitrage (in line with the HFRI Merger Arb Index)
Source: MergerStat, Bloomberg, J.P. Morgan Asset Management
For illustrative purposes only
Periods to 31st October 2011Merger
ArbitrageMSCI World
Total Return (annualised) 6.9% 0.4%
Risk 4.9% 16.7%
IR 0.8 n/a
Maximum Drawdown 14.1% 55.4%
Longest Recovery Period 1.9 yrs 6.6 yrs
Beta 0.13 -
* Performance includes backtested data from 31/01/99 to 31/07/09, performance of the merger arbitrage strategy within the JPMorgan Funds - Systematic Alpha fund to 31/03/11 and actual performance of the JPMorgan Investment Funds – Global Merger Arbitrage Fund thereafter. Performance is shown net of C share class fees. The Merger Arbitrage strategy looks to capture the deal risk premium and therefore gains exposure to all announced deals subject to liquidity constraints. For the purposes of the back-test, the model positions were generated historically using the data available at the time and run forward. The Fund is an actively managed portfolio; holdings, sector weights, allocations and leverage as applicable, are subject to change and the Fund is managed to internal guidelines which are not absolute and can change over time. The targets and aims provided are the Investment Manager’s targets and aims only and are not part of the Fund’s investment objective and policy as stated in the Fund’s Prospectus.Past performance is not indicative of future results.
Historical Performance Analysis
-40.0%
0.0%
40.0%
80.0%
120.0%
160.0%
Merger Arbitrage*
MSCI World
Live performance*→→
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Premium exists due to negative skew
Diversification is central to merger arbitrage – more names reduces idiosyncratic risk
High levels of merger activity are positive for the strategy
Average return to a merger arbitrage deal
Return per merger deal
Per
cen
t o
f d
eals
Source: MergerStat, Bloomberg, JPMAM. Jan 1999 to Jul 2011. For illustrative purposes only. Opinions and analysis are JPMAM’s judgment and can be subject to change without notice.
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60%
-100
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-80.
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-60.
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-40.
0%
-20.
0%0.
0%20
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40.0
%60
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80.0
%
100.
0%
120.
0%
140.
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160.
0%
180.
0%
200.
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An example - Burger King
3G Capital looked to acquire Burger King and made an offer on 2/9/2010
Given that this was a friendly deal with a high likelihood of success, the premium available was limited. We bought the stock at USD 23.59, selling it to 3G Capital for USD 24
The deal completed on October 20th and thus earned 1.7%
While this may initially sound low, this was over a 2 month period roughly equating to an annualised figure of over 10%
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Source: Bloomberg October 2010For illustrative purposes only. The inclusion of the securities mentioned above is not to be interpreted as recommendations to buy or sell.
Pri
ce
bought
sold
Merger activity is returning to the long term average
Current levels of activity are in line with the long term average following lower levels of activity in 2008
Number of all deals pending per month
Sources: Bloomberg as at 30th September 2011. For illustrative purposes only.
2000
4000
6000
8000
10000
Mar
-99
De
c-9
9
Se
p-0
0
Jun
-01
Mar
-02
De
c-0
2
Se
p-0
3
Jun
-04
Mar
-05
De
c-0
5
Se
p-0
6
Jun
-07
Mar
-08
De
c-0
8
Se
p-0
9
Jun
-10
Mar
-11
Deal Count
8
9
Sources: Bloomberg as at 30th June 2011
The outlook for increased merger activity is strong
Mergers and acquisitions (“M&A”) activity expected to recover towards the end of 2011. US corporate cash flow has risen to record levels as recession turned towards recovery. This is likely to lead to a recovery in capex or M&A transactions
1010
Allocation should vary depending on attractiveness of premium
Source: MergerStat, Bloomberg, J.P. Morgan Asset Management
For illustrative purposes only. Opinions and analysis constitute JPMAM’s judgment and is subject to change without notice.
-4.0%
0.0%
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8.0%
Real Premium (premium minus interest rate)
Broader event based strategies will exhibit style drift (e.g. credit 06/07) when the strategy is less appealing - it may be more appropriate to move to cash
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Contrasting an active and systematic approach
Potential alpha from security selection
High cost
Pre deal investing
Lack of transparency – potential style drift
Concentration can lead to higher negative skew
Non-UCITS structure
No alpha – captures the full opportunity set
Low cost
Low beta, pure allocation to merger arbitrage
Transparent
Diversification of deals
UCITS III, liquid structure
ACTIVE SYSTEMATIC
A systematic approach offers low cost liquid access to a pure Merger Arbitrage strategyOpinions and analysis constitute JPMAM’s judgment and is subject to change without notice.
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Fund features – JPMorgan Funds - Global Merger Arbitrage Fund
Luxembourg registered UCITS III, open-ended fund with a cash benchmark
Denominated in USD with hedged share classes in EUR and GBP
Typically 80 - 100 positions
Use of short equity positions and cash in addition to long equity exposure
Volatility typically 5-7%
Diversified, global portfolio of liquid securities giving exposure to the full merger opportunity set
A share class 1.50% AMC with 10% performance fee above cash
C share class 0.75% AMC with 10% performance fee above cash
The Fund is an actively managed portfolio; holdings, sector weights, allocations and leverage as applicable, are subject to change and the Fund is managed to internal guidelines which are not absolute and can change over time. The targets and aims provided are the Investment Manager’s targets and aims only and are not part of the Fund’s investment objective and policy as stated in the Fund’s Prospectus. Performance fee: High water mark. Benchmark: British Bankers’ Association (BBA) LIBOR one-month US Dollar deposits.
The merger arbitrage risk premium in our strategy
The target company is purchased subject to a number of filters:
– Domicile: Global
– Deal size: Minimum USD 500m, smaller deals subject to no more than 1% of the free float
– Liquidity: Minimum 3mth average daily volume above USD 2m
– Premium: Must be at least 5% prior to the announcement
We hedge the offer and therefore short the offer stock where appropriate, can occasionally use futures
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The Fund is managed to internal guidelines which are not absolute and can change over time. The targets and aims provided are the Investment Manager’s targets and aims only and are not part of the Fund’s investment objective and policy as stated in the Fund’s Prospectus.
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Investment process – a systematic approach
Cash invested will vary
– As opportunities decline portfolio allocates to cash
Proprietary screening
– Software developed in house automates screening subject to filters
– Continuously scanning MergerStat and Bloomberg M&A databases for timely dealing
– News filter developed to constantly scan for deals announced during market hours to capture additional uplift
The Fund is managed to internal guidelines which are not absolute and can change over time. The targets and aims provided are the Investment Manager’s targets and aims only and are not part of the Fund’s investment objective and policy as stated in the Fund’s Prospectus.
Example of early entry: Potash Corporation of Saskatchewan
Company acquisition announced during market hours
News filter allowed us to buy Potash Corp of Saskatchewan at 48.44 which then opened the next day at above 50 once the information entered all the major databases
This was an additional 3% gain
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Source: Bloomberg
Pric
e
The Fund is managed to internal guidelines which are not absolute and can change over time. The targets and aims provided are the Investment Manager’s targets and aims only and are not part of the Fund’s investment objective and policy as stated in the Fund’s Prospectus. Past performance is no indicator for future performance. For illustrative purposes only. The inclusion of the securities mentioned above is not to be interpreted as recommendation to buy or sell.
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Strategy methodology and portfolio construction
Position sizing
– Equal notional amounts invested across opportunity set to ensure maximum diversification
– Maximum position per deal is typically 2.5%
– If deal volumes low, portfolio will hold cash
Rebalancing
– Exit policy: Deals exit the portfolio either on deal completion or termination. When a new deal enters the portfolio while the portfolio is fully invested, the portfolio weights are rebalanced accordingly to minimise transaction costs
– Maximum inclusion time: Maximum of 1 year, sold if merger does not close within 1 year
Separate and independent compliance/legal/risk monitoring
– Daily V@R reports calculated independently and circulated to management
– Pre- and post-trade - orders screened prior to reaching dealers, independent compliance check.
– Investment Director tasked with oversight of funds – formal quarterly reviews
– Compliance and audit reviews
– Investment desk managed quantitative controls
The Fund is managed to internal guidelines which are not absolute and can change over time. The targets and aims provided are the Investment Manager’s targets and aims only and are not part of the Fund’s investment objective and policy as stated in the Fund’s Prospectus. Opinions and analysis offered constitute JPMAM’s judgment and are subject to change without notice. V@R: Value at risk.
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The investment team for hedge fund beta suite of strategies
Source: J.P. Morgan Asset Management. Investment professionals based in London unless otherwise stated. There can be no assurance that the professionals currently employed by JPMAM will continue to be employed by JPMAM or that the past performance or success of any such professional serves as an indicator of such professional’s future performance or success.
Independent
JPMAM Investment Committee
Investment Director Review
Risk
Compliance
Settlements
Performance Reporting
Model & Risk Monitoring
CIO & Head of the Global Multi-Asset Group
Neill Nuttall
Portfolio Management & Research
Client Portfolio Management
Yazann Romahi
Senior Portfolio Manager
Katherine Santiago
Portfolio Manager
Victor Li
Quant Analyst
Michael Feser (NY)
Head of GMAG Quantitative Research
Quant Council
Portfolio Implementation
Talib Sheikh, Gareth Witcomb & Shrenick
Shah
Portfolio Managers
Despoina Tripylioti & Peter Malone
Assistant Portfolio Managers
Centralised Dealing
Kristian West
+13 dealers
+ Global Order Routing
Olivia Mayell
Head of International CPM
team
Hannah Sparrow
Marc Shaw
Michael Lesley
Mikko Iso-Kulmala
Nicholas Hurley
Global Strategy Team
Neill Nuttall
James Elliot
Jonathan Lowe (HK)
David Shairp
Talib Sheikh
Antony Vallee
Pat Jakobson (US)
Jeff Geller (US)
Sector & regional allocation – current portfolio
Source: J.P. Morgan Asset Management as at 31st October 2011. Restated to 100%. The Fund is managed to internal guidelines which are not absolute and can change over time. The targets and aims provided are the Investment Manager’s targets and aims only and are not part of the Fund’s investment objective and policy as stated in the Fund’s Prospectus. Opinions and analysis offered constitute JPMAM’s judgment and are subject to change without notice.
Region
65%7%
9%
13%
2%
2%1%1%
United States
UnitedKingdomCanada
Australia
Europe
Switzerland
Japan
Other
Sector
5% 2%
19%
6%
15%
8%
2%
13%
16%
14%ConsumerDiscretionaryConsumer Staples
Energy
Financials
Health Care
Industrials
InformationTechnologyMaterials
TelecommunicationServicesUtilities
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Have we captured the merger arbitrage hedge fund style?
Merger Arbitrage strategy since inception (*): +14.4% (net of C share class fees)
HFRI ED: Merger Arb Index: +10.7% (net of fees of typically 2/20)
– Beta to MSCI World is 0.13
– Volatility is 4.9% compared to 16.7% for the
MSCI World index
Source: HFR, JPMAM. As at 31st October 2011.
* Inception Date – July 2009, performance is cumulative. Fees and charges for the C share class as follows: No initial charge, 0.75% annual management and advisory fee, 0.20% operating and administrative expenses and no redemption charge. The Fund is managed to internal guidelines which are not absolute and can change over time. The targets and aims provided are the Investment
Manager’s targets and aims only and are not part of the Fund’s investment objective and policy as stated in the Fund’s Prospectus .
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
JPM Merger Arb
HFRI Merger Arb Index
HFRX Merger Arb Index
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What is the potential return from pure merger arbitrage currently?
Around 20% of deals fail
Around 5% see counterbids
Typically deals complete in 3-4 months
Current Non-Negative Premium (Duration Adjusted)
Source: J.P. Morgan Asset Management, Bloomberg as at October 2011
For illustrative purposes only. The Fund is managed to internal guidelines which are not absolute and can change over time. The targets and aims provided are the Investment Manager’s targets and aims only and are not part of the Fund’s investment objective and policy as stated in the Fund’s Prospectus. Opinions and analysis offered constitute JPMAM’s judgment and are subject to change without notice.
0%
10%
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60%
02/03/11
16/03/11
30/03/11
13/04/11
27/04/11
11/05/11
25/05/11
08/06/11
22/06/11
06/07/11
20/07/11
03/08/11
17/08/11
31/08/11
14/09/11
28/09/11
12/10/11
26/10/11
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JPMorgan Funds – Global Merger Arbitrage Fund
Merger arbitrage is a diversifying absolute return strategy
Now is an attractive time for merger activity
Low fee, liquid access to a strategy typically only offered by hedge funds
Strategy has returned 14% since inception* after fees with less than 5% volatility
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* Cumulative return as at 31st October 2011 since inception of strategy from 31st July 2009.
The Fund is managed to internal guidelines which are not absolute and can change over time. The targets and aims provided are the Investment Manager’s targets and aims only and are not part of the Fund’s investment objective and policy as stated in the Fund’s Prospectus. Opinions and analysis offered constitute JPMAM’s judgment and are subject to change without notice.
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Selected Risks
Risk Profile
JPMorgan Funds – Global Merger Arbitrage Fund (‘the Fund’) involves substantial risks, including but not limited to those described below:
– This Fund invests primarily in a global portfolio of equities of companies which are, or may become subject to merger activity, using financial derivative instruments where appropriate.
– The Fund will invest in equities and financial derivative instruments on equities and investors may see the value of their investment fall as well as rise on a daily basis, and they may get back less than they originally invested.
– Investors should be aware that the Fund may invest in emerging markets, which may be subject to additional political and economic risks, while stocks can be negatively impacted by high volatility, low liquidity, poor transparency and greater financial risks.
– The Fund invests in a single strategy which may, at times, result in a concentrated exposure to a small number of companies, countries or sectors. While providing a focused investment this limits the room for risk diversification within the Fund.
– The Fund may invest in smaller companies which can be less liquid and more volatile than larger companies, and tend to carry greater financial risk.
– This Fund will have significant exposure to financial derivative instruments. The risks associated with the financial derivative instruments listed in the investment policy are further detailed in "Appendix IV – Risk Factors".
– The possible loss from taking a short position on a security differs from the loss that could be incurred from a cash investment in the security; the former may be unlimited as there is no restriction on the price to which a security may rise, whereas the latter cannot exceed the total amount of the cash investment. The short selling of investments may be subject to changes in regulations, which could adversely impact returns to investors.
– The strategy may be impacted by changes in regulations or accounting rules pertaining to merger activity.
– There is no guarantee that individual mergers or corporate actions will complete or that stock prices will move as expected.
– USD is the reference currency of the Fund but assets may be denominated in other currencies, including emerging market currencies, and currency exposure may be hedged.
– The Fund will be managed without reference to its benchmark.
For more information on the risks of investment please refer to the Fund’s Prospectus
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Fees & Expenses
Share Class Initial ChargeAnnual Management
& Advisory FeeOperating & Administrative
ExpensesRedemption
Charge
Minimum Initial Subscription (USD or
equivalent)JPM Global Merger Arbitrage A 5.00% 1.50% 0.40% 0.50% 35,000JPM Global Merger Arbitrage B Nil 0.90% 0.25% Nil 1,000,000JPM Global Merger Arbitrage C Nil 0.75% 0.20% Nil 10,000,000JPM Global Merger Arbitrage D 5.00% 2.25% 0.40% 0.50% 5,000JPM Global Merger Arbitrage I Nil 0.75% 0.16% Max Nil 10,000,000JPM Global Merger Arbitrage X* Nil Nil 0.15% Max Nil On application
The Fund will charge an AMC of 1.50% p.a., with operating and administrative expenses of 0.40% p.a. for A share classes
*Shares of X Share Classes may only be acquired by Institutional Investors who are clients of the Management Company or JPMorgan Chase & Co. and (i) which meet the minimum account maintenance or qualification requirements established from time to time for JPMorgan Chase & Co. client accounts and/or (ii) whose Share Class X Shares will be held in a JPMorgan Chase & Co. client account subject to separate advisory fees payable to the Investment Manager or any of its affiliated companies.Unless stated otherwise in the Fund specific details, Shares of X Share Classes are designed to accommodate an alternative charging structure whereby a fee for the management of the Fund is administratively levied and collected by the Management Company or through the relevant JPMorgan Chase & Co. entity directly from the Shareholder. The Annual Management and Advisory Fee is therefore listed as "Nil" in the Fees and Expenses tables in this appendix, due to it not being levied on the Fund.
Share Classes Performance Fee Mechanism Performance Fee Benchmark
All, except EUR/GBP hedged 10% High Water Mark BBA LIBOR 1-month USDEUR hedged 10% High Water Mark BBA LIBOR 1-month USD hedged into EURGBP hedged 10% High Water Mark BBA LIBOR 1-month USD hedged into GBP
Fees and Expenses:
Performance Fee:
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Biographies
Olivia Mayell
Olivia Mayell, managing director, heads the client portfolio management team in the Global Multi-Asset Group in London, responsible for the range of products. She has particular focus on income, convertibles, alternatives and total return accounts. An employee since 2000, previously Olivia was a client portfolio manager for the global equity product range at J.P. Morgan Asset Management, working on the dynamic and convertible portfolios. Olivia obtained a BSc (Hons) in Natural Science from Durham University.
Yazann Romahi
Yazann Romahi, executive director, is a senior portfolio manager in the Global Multi-Asset Group, based in London. He is Head of Quantitative Portfolio Strategies - a team responsible for a number of quantitatively driven funds including the multi-strategy JPM Systematic Alpha fund, the JPM Global Merger Arbitrage Fund as well as maintaining responsibility for the development of the Global Tactical Asset Allocation models and providing quantitative support to other GMAG groups including the Convertible Bonds team. An employee since 2003, Yazann joined the firm from the Centre for Financial Research at the University of Cambridge where he worked as a research analyst and did consulting work for a number of leading financial institutions including Pioneer Asset Management, PricewaterhouseCoopers and HSBC. Yazann also previously taught undergraduate courses in statistics and operations research at the University of Cambridge. Yazann holds a PhD in Applied Mathematics from the University of Cambridge and is a CFA charterholder.
There can be no assurance that the professionals currently employed by JPMAM will continue to be employed by JPMAM or that the past performance or success of any such professional serves as an indicator of such professional’s future performance or success.
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Appendix
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Types of merger activity
Deals completed with acquirer stock signals strong valuations
When cash is cheap companies will prefer cash funded acquisitions over stock funded acquisitions
Source: Bloomberg, JPMAM as at 30 September 2011. For illustrative purposes only. Opinions and analysis offered constitute JPMAM’s judgment and are subject to change without notice..
Credit bubble – more cash deals
27
While North American deals are most active in mergers and acquisitions, European and to a lesser extent Asia Pacific deals do provide a significant amount of diversification
In the current portfolio, North American deals dominate the portfolio
Source: Bloomberg. As at 31st October 2011.
0
300
600
900
1200
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Asia Pacific (Developed)
Western Europe
North America
A global opportunity set
No. of deals
The Fund is managed to internal guidelines which are not absolute and can change over time. The targets and aims provided are the Investment Manager’s targets and aims only and are not part of the Fund’s investment objective and policy as stated in the Fund’s Prospectus. Opinions and analysis offered constitute JPMAM’s judgment and are subject to change without notice.
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Implementation – dedicated portfolio construction tools
For illustrative purposes only. The inclusion of the securities mentioned above is not to be interpreted as recommendations to buy or sell.
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Diversification of deals
Last year, the number of stocks reached near historic lows though activity has picked up recently
Current number of deals is in line with the historical average of around 80
Typically it takes two years before merger activity reaches pre-recessionary levels
Currently, 13% of deals in the portfolio are stock deals
Number of Deals in Portfolio Over time
Source: JPMAM. August 2009 - October 2011.The Fund is managed to internal guidelines which are not absolute and can change over time. The targets and aims provided are the Investment Manager’s targets and aims only and are not part of the Fund’s investment objective and policy as stated in the Fund’s Prospectus. Opinions and analysis offered constitute JPMAM’s judgment and are subject to change without notice.
3030
A diversified portfolio limits downside risk
The evidence supporting the hypothesis that the merger arbitrage strategy is akin to a short put is weak.
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
-20.00% -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
-20.00% -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00%
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Cash Mergers - Monthly Return of the strategy
S&P Monthly Return
Stock for Stock Manager - Monthly Return of the strategy
Source: MergerStat, Bloomberg, JPMAM. Jan 1999 to Jul 2011. Opinions and analysis offered constitute JPMAM’s judgment and are subject to change without notice.
Return to merger arbitrage
S&P Monthly Return
Return to merger arbitrage
Attribution – Top 5 / bottom 5 deals
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Top 5 DealsTarget Acquirer Deal Type Outcome Country Announced Completion Return3PAR Inc Dell/HP Cash Complete US 16/08/2010 24/09/2010 83.13%
Sperian Protection Cinven Ltd/ Honeywell Cash Complete FR 31/03/2010 15/09/2010 66.55%
Terra Industries Inc CF Industries/ Yara Cash Complete US 15/01/2010 16/04/2010 35.03%
AWB Ltd Agrium/GrainCorp Cash Pending AU 30/07/2010 24/08/2010 32.67%
Chloride Group PLC Emerson Electric/ ABB Cash Complete GB 23/04/2010 03/09/2010 26.26%
Bottom 5 DealsTarget Acquirer Deal Type Outcome Country Announced Completion Return
Indophil Zijin Mining Cash Terminated AU 30/11/2009 24/06/2010 -50.15%
Emmis Communications Corp Multiple acquirers Cash Terminated US 26/04/2010 09/09/2010 -53.68%
MacArthur Coal Ltd Peabody Energy Corp Cash Terminated AU 30/03/2010 18/05/2010 -32.22%
CPI International Inc Comtech Telecommunications Corp Cash and Stock Terminated US 10/05/2010 07/09/2010 -13.15%
Transurban Group Multiple acquirers Cash Terminated AU 12/05/2010 25/05/2010 -11.67%
For illustrative purposes only. The inclusion of the securities mentioned above is not to be interpreted as recommendations to buy or sell.
Example of a counterbid situation: 3PAR
Dell made an initial offer on 16th of August. As the market expected that their initial offer of $17 was too low, the stock promptly jumped to $18 which is where we purchased it
HP then offered $25, followed by a counteroffer from Dell for $32 and finally an offer of $33 from HP
On this stock therefore, we made 83%
32
Source: Bloomberg
Pric
e
bought
For illustrative purposes only. The inclusion of the securities mentioned above is not to be interpreted as recommendations to buy or sell. Past performance is not indicative for future performance. The Fund is an actively managed portfolio subject to change.
Example of failed bid: MacArthur Coal
Peabody Energy make an unsolicited offer for MacArthur Coal on March 30, 2010 at $13 per share
New Hope Corp counter on April 9, 2010 and 4 days later increase their bid by 7.44% to $14.50 per share
Peabody Energy counter on May 10 with an offer of $16
After Australia introduces a 40% tax on mining profits, Peabody reduces its bid to $15 per share
The board rejects the offer and MacArthur Coal drops to $10.10
As the market had been expecting counterbids, our entry price was at $14.80
33
Source: Bloomberg
Pric
e
bought
For illustrative purposes only. The inclusion of the securities mentioned above is not to be interpreted as recommendations to buy or sell. Past performance is not indicative for future performance. The Fund is an actively managed portfolio subject to change.
3434
Percent of deals open on any given date that eventually complete
The completion rates is highly correlated with outperformance and underperformance of the strategy
The current deal completion rate is high
Source: Bloomberg, JPMAM as at 30th September 2011. Based on a six month moving average.
Deal completion rate
What is Hedge Fund Beta?
A significant amount of “alpha” from hedge funds can be attributed to ‘hedge fund beta’
Often the advantage of investing in hedge funds is accessing these uncorrelated sources of risk premia
We seek to provide a liquid, transparent alternative to access these uncorrelated sources of return, currently only accessible through less liquid, often opaque hedge fund investments
35
Traditional Beta AlphaHedge Fund Beta
Equity Premium
Credit Premium
Commodity (GSCI)
Equity Small Cap
Small Cap Premium
Value Premium
Equity Value
Commodities Roll Yield
Merger Arbitrage
Forward Rate Bias Earnings Momentum
Equity Momentum
Commodities Momentum
Term Premium
Vol Insurance Premium
Convertible Arbitrage
FX Momentum
Alternative Beta
Manager Driven
Non-systematic
High Frequency
increasing order of complexityincreasing order of complexity
For illustrative purposes only. The targets and aims provided above are the Investment Manager’s targets and aims only and are not part of the Funds investment objective and policy as stated in the Fund’s prospectus. There is no guarantee that these targets and aims will be achieved. The Fund is an actively managed portfolio; holdings, sector weights, allocations and leverage as applicable, are subject to change and the Fund is managed to internal guidelines which are not absolute and can change over time. Opinions and analysis offered constitute JPMAM’s judgment and are subject to change without notice.
JPMorgan Funds - Systematic Alpha Fund
Aims to capture the systematic components of hedge fund returns (referred to as hedge fund beta).
Not hedge fund index replication. A fund of uncorrelated liquid alternative strategies
Three diversifying strategies:
– Merger arbitrage
– Long/Short equity
– Global Macro
3636
For further information on the Fund, please see the Fund’s prospectus. The targets and aims provided above are the Investment Manager’s targets and aims only and are not part of the Funds investment objective and policy as stated in the Fund’s prospectus. There is no guarantee that these targets and aims will be achieved. For illustrative purposes only. The Fund is an actively managed portfolio; holdings, sector weights, allocations and leverage as applicable, are subject to change and the Fund is managed to internal guidelines which are not absolute and can change over time.
37
JPMorgan Funds - Systematic Alpha Fund : back-tested performance
Portfolio weights roughly equally risk weighted by hedge fund style
Transaction costs have been modelled in all factors
Source: J.P. Morgan Asset Management. Period: January 1996 – 31st October 2011 (total return net of fees).
*Fund inception is 1 July 2009. **HFRI Fund of Funds Composite Index.
Total Return
JPM Systematic Alpha Fund*
HFRI FOF Index
(Non investable)**
Return (annualised) 9.4% 5.7%
Risk 4.9% 6.3%
Sharpe/IR 1.2 0.3
Drawdown 12.4% 22.2%
0%
50%
100%
150%
200%
250%
300%
350%Systematic Alpha
HFRI Fund of Fund index
Live performance*→→
For illustrative purposes only. The Fund is an actively managed portfolio; holdings, sector weights, allocations and leverage as applicable, are subject to change and the Fund is managed to internal guidelines which are not absolute and can change over time. Past performance is not indicative of future results. The back-tested period consists of the performance of three underlying strategies with each strategy being equally risk weighted. The three strategies are Merger Arbitrage, Equity Long/Short (beta neutral) and Global Macro. The Merger Arbitrage portion looks to capture the deal risk premium and therefore gains exposure to all announced deals subject to liquidity constraints. The Equity Long/Short (beta neutral) model captures the alternative risk premia embedded in the style by going long value stocks with positive momentum subject to quality constraints. Finally, the Global Macro style takes advantage of the forward rate bias in FX, and the long/short term premium in government bonds as well as commodities. For the purposes of the back-test, the model positions were generated historically using data available at the time and run forward.
Equity Long/Short
Value Premium
– Risk Premium
– Strategy: Long low P/E Value stocks, Short high P/E
stocks
– These factors form the backbone of many quantitative
equity products
Momentum
– Return chasing
– Strategy: Buy stocks whose momentum is in the top decile
while shorting those in the bottom decile. Holding period 1
month.
Earnings Momentum
– Market Bias
– Strategy: Long positive earnings revision stocks, short
negative revision stocks
Quality
– Behavioural bias
– Strategy: Long positions with decreasing accruals, short
stocks with growing accruals
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– Remain market neutral - run a zero beta and ensure sector and country neutrality
38
For illustrative and discussion purposes only. The Fund is an actively managed portfolio; holdings, sector weights, allocations and leverage as applicable, are subject to change and the Fund is managed to internal guidelines which are not absolute and can change over time. The targets and aims provided above are the Investment Manager’s targets and aims only and are not part of the Funds investment objective and policy as stated in the Fund’s Prospectus. There is no guarantee that these targets and aims will be achieved.
39
Historical analysis for Long/Short Equity : back-tested performance
In line with the hedge fund style, 2009 was poor
While 2010 was positive, the market neutral equity strategy is still below its peak
Has come back strongly in 2011
Source: Factset, Bloomberg, J.P. Morgan Asset Management, 31st October 2011For illustrative purposes only. *Fund inception 1 July 2009.
Historical Performance Analysis
Periods to 31st October 2011Equity
Long/ShortMSCI World
Excess Return (annualised) 5.6% 3.2%
Risk 6.1% 16.4%
IR 0.90 -0.01
Maximum Drawdown 10.9% 55.4%
Beta -0.11
The Fund is an actively managed portfolio; holdings, sector weights, allocations and leverage as applicable, are subject to change and the Fund is managed to internal guidelines which are not absolute and can change over time. The targets and aims provided are the Investment Manager’s targets and aims only and are not part of the Fund’s investment objective and policy as stated in the Fund’s Prospectus. The Equity Long/Short (beta neutral) model captures the alternative risk premia embedded in the style by going long value stocks with positive momentum subject to quality constraints. For the purposes of the back-test, the model positions were generated historically using data available at the time and run forward. Past performance is not indicative of future results.
0%
50%
100%
150%
200%
250%
300%
Live performance*→→
4040
Live performance vs the HFR market neutral indices
It is important to note here that unlike the merger arbitrage style, there is significantly more dispersion amongst the managers that make up the HFR Market Neutral Index. We thus do not expect to match the index in the same way
Source: HFR (Hedge Fund Research), J.P. Morgan Asset Management. * As at 31 st October 2011. Restated to be fully invested.
For illustrative purposes only. Past performance is not indicative of future results. Fund inception 1 July 2009. The targets and aims provided are the Investment Manager’s targets and aims only and are not part of the Fund’s investment objective and policy as stated in the Fund’s Prospectus.
Hedge Fund Beta Long/Short Equity since inception (*): +13.69%
HFR Market Neutral Index : -1.70%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Jul-0
9Sep
-09
Nov-0
9Ja
n-10
Mar
-10
May
-10
Jul-1
0Sep
-10
Nov-1
0Ja
n-11
Mar
-11
May
-11
Jul-1
1Sep
-11
Hedge Fund Beta Long/Short Equity
HFR Market Neutral Index
41
Global Macro / Managed Futures
The Global Macro hedge fund style has significant dispersion amongst underlying managers. However, certain exotic beta strategies are commonplace:
– Bond Markets: Although the term premium is considered a traditional beta, converting this into a long/short duration neutral relative term premium transforms this into an exotic beta
– FX: One of the most commonly known behavioural biases in FX is the Forward Rate Bias. We implement this amongst both G10 & EM countries and build a relative momentum model to augment this
– Commodity Markets: The term structure in commodities generally reflects both expected changes in spot prices as well as an insurance premium
If hedgers are net short, the term structure is likely to be backwardated and thus a long position will earn a risk premium Likewise, if hedgers are net long, then contango is likely and thus short positions earn a risk premium
41
The aims and objectives provided above are the investments manager’s aims and objectives and do not necessarily reflect the investment objective and policy of the Fund as stated in the Prospectus. There is no guarantee that these aims and objectives will be achieved. Opinions and analysis offered constitute JPMAM’s judgment and are subject to change without notice.
42
Historical analysis for Global Macro : back-tested performance
2010 was a very volatile year which has been difficult for trend models to capture
Nevertheless, the macro models were flat over 2010 and have performed well in 2011
Source: Factset, Bloomberg, J.P. Morgan Asset Management, 31st October 2011*Fund inception 1 July 2009.
Historical Performance Analysis
Periods to 31st October 2011Global Macro Hedge Fund
BetaMSCI World
Excess Return (annualised) 8.2% -0.2%
Risk 5.0% 16.3%
IR 1.63 -0.01
Maximum Drawdown 10.6% 55.4%
Beta 0.00
For illustrative purposes only. The Fund is an actively managed portfolio; holdings, sector weights, allocations and leverage as applicable, are subject to change and the Fund is managed to internal guidelines which are not absolute and can change over time. The targets and aims provided are the Investment Manager’s targets and aims only and are not part of the Fund’s investment objective and policy as stated in the Fund’s Prospectus. Global Macro style takes advantage of the forward rate bias in FX, and the long/short term premium in government bonds as well as commodities. For the purposes of the back-test, the model positions were generated historically using data available at the time and run forward. MSCI: Morgan Stanley Capital International.
Past performance is not indicative of future results.
0%
100%
200%
300%
400%
500%
600%
Live performance*→→
4343
Live performance vs the HFRI Systematic Macro
Hedge Fund Beta Macro since inception (*): -0.82%
HFRX Macro Index: -9.60% The biggest dispersion in style is in the Macro index
It is difficult to say therefore that we are able to capture this style
However, there are certain biases and alternative risk premia that we outlined previously that we seek to capture. These risk premia do form a component of the returns associated with the style
Source: HFR (Hedge Fund Research), J.P. Morgan Asset Management. *As at 31st October 2011. Restated to be fully invested
For illustrative purposes only. Past performance is not indicative of future results . The targets and aims provided are the Investment Manager’s targets and aims only and are not part of the Fund’s investment objective and policy as stated in the Fund’s Prospectus. HFRX Macro: A macro composite index in USD, provided by Hedge Fund Research, Inc.
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
Jun
-09
Au
g-0
9
Oct-0
9
De
c-09
Fe
b-1
0
Ap
r-10
Jun
-10
Au
g-1
0
Oct-1
0
De
c-10
Fe
b-1
1
Ap
r-11
Jun
-11
Au
g-1
1
Oct-1
1
Hedge Fund Beta Macro
HFRX Macro Index
44
Hypothetical Performance:
Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading programme.
One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading programme in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading programme which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.
This material contains results that are simulated. Simulations are based on a number of working assumptions that may not be capable of duplication in actual trading. Simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated returns do not represent actual trading. Also, since the trades have not actually been executed, the results may have over or under-compensated for the impact, if any, of certain market factors such as liquidity constraints, fee schedules and transaction costs. Simulated trading programmes in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that future performance will or is likely to achieve profits or losses similar to those shown.
This material is intended to report solely on the investment strategies and opportunities identified by JPMorgan Asset Management. Additional information is available upon request. Information herein is believed to be reliable but JPMorgan Asset Management does not warrant its completeness or accuracy. Opinions and estimates constitute our judgement and are subject to change without notice. Past
Footnotes
performance is not indicative of future results. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. JPMorgan Asset Management and/or its affiliates and employees may hold a position or act as market maker in the financial instruments of any issuer discussed herein or act as underwriter, placement agent, advisor or lender to such issuer. The investments and strategies discussed herein may not be suitable for all investors; if you have any doubts you should consult your JPMorgan Asset Management Client Advisor, Broker or Portfolio Manager. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. You should consult your tax or legal advisor about the issues discussed herein. The investments discussed may fluctuate in price or value. Investors may get back less than they invested. Changes in rates of exchange may have an adverse effect on the value, price or income of investments.
Performance results are gross of investment management fees. The deduction of an advisory fee reduces an investor’s return. Actual account performance will vary depending on the size of a portfolio and applicable fee schedule. The following is an example of the effect of compounded advisory fees over a period of time on the value of a client’s portfolio: A portfolio with a beginning value of $100, gaining an annual return of 10% per annum would grow to $259 after 10 years, assuming no fees have been paid out. Conversely, a portfolio with a beginning value of $100, gaining an annual return of 10% per annum, but paying a fee of 1% per annum, would only grow to $235 after 10 years. The annualised returns over the 10 year time period are 10.00% (gross of fees) and 8.91% (net of fees). If the fee in the above example was 0.25% per annum, the portfolio would grow to $253 after 10 years and return 9.73% net of fees. The fees were calculated on a monthly basis, which shows the maximum effect of compounding.
Approved for issue in the UK by J.P. Morgan Asset Management (UK) Limited, which is authorised and regulated by the Financial Services Authority. Copyright 2007 J.P. Morgan Chase & Co. Clients should contact and effect transactions through a JPMorgan Asset Management entity in their home jurisdiction unless governing law permits otherwise. JPMorgan Asset Management is the marketing name for the asset management activities of J.P. Morgan Chase & Co. and its subsidiaries.
45
Contact
Olivia Mayell – Managing Director, Client Portfolio Manager, Global Multi-Asset Group
Tel +44 (0)20 7742 5467
e-mail: [email protected]
Hannah Sparrow – Vice President, Client Portfolio Manager, Global Multi-Asset Group
Tel +44 (0)20 7742 3413
e-mail: [email protected]
Marc Shaw – Vice President, Client Portfolio Manager, Global Multi-Asset Group
Tel +44 (0)20 7777 5073
e-mail: [email protected]
J.P. Morgan Asset Management
46
For professional financial advisers only – not for use by or distribution to retail investors.
The information in this document is based on our understanding of law and regulation at the time of print and is subject to change. The value of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. Past performance is not a guide to the future.
Investments in smaller companies may involve a higher degree of risk as small cap markets tend to be much more volatile than their larger capitalisation counterparts. Investments may be concentrated in any one country, sector or issuer. The fund may have a significant exposure to high yield bonds, emerging market bonds or non investment grade or unrated bonds at any time. Non-investment grade bonds may increase the risk to capital. Derivatives may be used to achieve fund objectives and allocations may vary significantly over time. The yield or the capital value of the fund (or both) can fluctuate and investors may not get back their original investment. Exchange rates may cause the value of underlying overseas investments to go down or up. Investments in emerging markets may be more volatile than other markets and the risk to capital is therefore greater. Also, the economic and political situations may be more volatile than in established economies and these may adversely influence the value of investments made.
This presentation does not contain sufficient information to support an investment decision and investors should ensure that they obtain all available relevant information before making any investment. A copy of the Fund prospectus and simplified prospectus are available free of charge from JPMorgan Asset Management Marketing Limited. Issued by JPMorgan Asset Management Marketing Limited which is authorised and regulated by the Financial Services Authority. Investment is subject to documentation (Prospectus, Simplified Prospectus and Terms and Conditions), copies of which can be obtained free of charge from JPMorgan Asset Management Marketing Limited. Registered in England No. 288553, 125 London Wall, London EC2Y 5AJ.