JP Morgan keeps faith with alternative mindset

Pablo Garnica, the amiable Spanish chief executive of JP Morgan Private Bank in the Emea region looks back wistfully at the less complex economic environment of the mid-1990s, when he first joined the American bank.

“In 1996, the euro was just a concept and private bankers were working with clients in pesetas and deutschemarks,” remembers Mr Garnica, who divides his time between the bank’s key European offices in Geneva and London’s Knightsbridge. “But there was already a view that the single currency would happen and that European companies would grow; they were beginning to access capital markets and private banking has proved a very good business for us.”

With the increasing pace of globalisation since those early, trend-setting days, wealth management groups now need to offer strategies which can dip into all regional opportunities in order to service the world’s richest families, he believes.

“We try to leverage all the ideas we see around the world for our clients,” says Mr Garnica, whose bank manages $770bn (€530bn) in assets for clients in the US, Emea, Latin America and Asia. “Our Spanish clients get the benefit of ideas sourced in Asia, but we believe we need to be very local in the way we deliver that idea.”

Currently, the bank, along with many of its competitors, is reviewing its underweight position in equities after the market correction, in anticipation of an economic recovery after the Japan earthquake. High yield positions are soon to be reduced, however, as JP Morgan’s wealthy clients have recently had the benefit of a doubling in prices after the improvement in corporate balance sheets.

Similarly, an analysis of cash-rich companies, beating expectations, has led the bank’s strategists to predict an imminent increase in M&A activity. “These are not dramatic calls that we are making,” says Mr Garnica, setting a reassuring tone. “But when we see something undervalued for some reason, we look into it.”

LIQUID SOLUTIONS

Unlike banks that are servicing a more sceptical mass market clientele, JP Morgan is also keeping the faith of alternative asset management, with the added comfort that the hedge fund platform was not exposed to Madoff funds.

“We have always been defenders of hedge funds, private equity and real estate,” he says, noting that the bank has a 20-year track record in hedge fund investments. “But we are less focused on real assets, because our clients already own land. We tell them: ‘If you want to play real assets, look at the commodities space, where there is a more liquid market.’ We tend to look at alternatives in their broader definition.”

This investing mindset mirrors clients’ increasing quest for more liquid solutions since the financial crisis of 2008. If exposure to hedge funds is less today then three years ago, this is because clients were able to cash in their investments when needed, claims Mr Garnica, although these flows are now returning to previous levels. “In our case, people were redeeming because they needed the money, not because hedge funds were falling out of favour. Some people fell out of love with these assets, but that was not a huge trend from our client base.”

One of the beauties of targeting such a high level of client is they can diversify portfolios enough to invest in both liquid and illiquid positions, he says. “Most clients want some money in each bucket. We are prudent in the way we use illiquid products. But it’s true that people are becoming more aware of liquidity and they want faster access to their cash than in the past.”

Communication was elevated to an “obsession” among JP Morgan’s relationship managers during the crisis, says Mr Garnica, with the bank fearing that clients might be surprised by problems relating to an “uncertain outcome”.

“Most of them thanked us for not hiding when things were not rosy,” he comments. “They welcomed the fact that we were picking up the phone when things were difficult.”

This meticulous approach to service standards is backed up by a target ratio of between 25 to 40 clients per relationship manager, among the best in the industry and Mr Garnica is keen to emphasise his client-centric vision, against a widely held view of JP Morgan as a product-pushing institution.

Criticism of this perceived weakness, where heads of private banking and asset management report to the same commercial head and board member, is accepted graciously and turned into an advantage by Mr Garnica. “Our responsibility is to bring the whole bank to our clients,” he says.

“We like to see ourselves as an entry point to the whole bank. We offer access to our own products, but also to very strong external managers.”

The private bank employs 100 people to conduct due diligence on hedge funds alone and a similar number to probe the traditional mutual funds universe. “This is how open we are to outside influence,” states Mr Garnica.

“In terms of investment products, we are more open than people think. The perception is that because we have an asset management machine, we favour those products, but it is just a perception. Looking at the resources we deploy for selection of funds is the best proof of our independence.”

He gives the example of Highbridge Capital, a New York-based hedge fund manager employing 470 staff and managing $28bn, purchased by JP Morgan Asset Management in 2009. “Look at Highbridge, which is one of the largest hedge fund managers. We don’t use everything they produce and the same is true for JP Morgan Asset Management.”

Similarly, the investment banking arm of JP Morgan is just one of the banks which Mr Garnica’s private banking unit uses for issuing structured products. The excessive issue of many products by investment banks through private banking distribution channels has received much adverse publicity since the crisis, but he defends their use vociferously.

“We were comfortable that everything we were doing with structured products was totally transparent,” he says. “People wanted protection and upside. From the point of view of our fiduciary responsibility vis-à-vis our clients, everything was perfectly good, although not everything worked.”

EXPANSION PLANS

There are few markets into which JP Morgan has yet to make inroads, but Mr Garnica has earmarked Russia for “more aggressive” expansion and also sees growing opportunities in the Middle East.

“But we also expect to see very strong growth in traditional markets such as Italy, Spain, the UK and France,” he says. “People talk about emerging markets, but we have good growth in those areas where wealth continues to grow and clients become more sophisticated.”

Improving penetration of the JP Morgan brand outside its traditional US stomping ground is one of the key pre-occupations in Mr Garnica’s search for new asssets. “My job is to look at how we can grow,” he says, referring to his ambitions in most European markets outside the UK, where both assets and reputation are already at high levels.

“We would like to be more visible in certain markets, where they understand what JP Morgan is – that it’s attached to quality, sophistication and good talent – but they don’t necessarily know we have a private bank.”

Pablo Garnica, JP Morgan