Actively managed but truly more profitable?

Opinion

Negative consumer sentiment in Canada toward anything American-made has not stopped one of the world’s largest investment managers from launching products north of the border.

JP Morgan Asset Management, based in New York, recently introduced a new actively managed exchange-traded fund (ETF), specially designed to provide Canadian investors with access to its world-leading U.S. stock-picking managers.

“Actively managed ETFs are what we do well and that expertise is what we’re bringing to Canada,” says Jay Rana, head of Canadian adviser business at J.P. Morgan Asset Management in Toronto.

Part of the storied U.S. investment bank J.P. Morgan Chase, the asset manager oversees US$3.7 trillion, among largest money managers in the world. It recently brought a stock-picking strategy for the U.S. stock market to Canada in an ETF wrapper that doesn’t even exist in that form in the U.S.

“It is truly a core U.S. equities position for investors’ portfolio,” Rana says about the JPMorgan US Core Active ETF (JCOR).

It is the fifth actively managed ETF launched in Canada in the last year by J.P. Morgan. Yet the others — JPMorgan U.S. Equity Premium Income Active ETF (JEPI), JPMorgan Nasdaq Equity Premium Income Active ETF (JEPQ), JPMorgan U.S. Growth Active ETF (JGRO) and JPMorgan U.S. Value Active ETF (JAVA) — all have U.S.-listed ETF twins, providing a track record of their performance.

The new JCOR ETF, launched in June, has a mutual fund twin in the U.S — and its long-term history is impressive. Its JPMCB U.S. Active Core Equity Fund (the mutual fund version) has beaten its benchmark index, the S&P 500, over the last 15 years. Albeit, it has done so by a little more than a half-percentage point.

Yet it is impressive all the same given the S&P Spiva Scorecard report on mutual fund performance shows more than 90 per cent of actively managed U.S. equity funds do not beat their benchmark over 10-year periods.

Rana chocks up the performance to J.P Morgan’s experience and size. “At J.P. Morgan, we do have an advantage across a number of asset classes just as a result of our scope and reach.”

Yet its recent launches of active ETFs is part of a larger trend. What was once almost strictly a passive product with low management fees, often a 10th of the cost annually of a similar mutual fund, the market is now seeing a wave of new active products, says Prerna Mathews, Mackenzie’s vice-president of ETF product Strategy in Toronto.

“Active ETFs now make up almost 35 per cent of total assets under management of all ETFs in Canada,” says Mathews, noting Mackenzie is a Canadian leader in actively managed ETFs.

Among those new funds on the market is the Mackenzie U.S. Low Volatility ETF (MULV) launched last year. “The demand is there because a lot of advisers see these as better portfolio tools.”

What’s more, she notes active management could come in handy in the years ahead.

Investors likely face many challenges: a volatile U.S. administration and ongoing trade strife, persistent inflation, swelling debt, environmental degradation and geopolitical unrest.

As well, the U.S. market is highly overvalued. It remains heavily weighted to big tech stocks. As such, a passive strategy mirroring the S&P 500 performance will certainly benefit when big tech does well, as it has recently, but it will also fall with big tech, which dominates the market.

Active management, according to one report by a top European active management asset firm, could help mitigate the many risks. Simply, active managers can navigate risks while seeking out opportunities a passive strategy can’t, Rana says.

“Active management can assess and respond to complex risks and adjust portfolios in real-time,” he says.

What’s more, one of the knocks against active management strategies has been fee costs. Mutual funds run by active managers can charge, for example, two per cent per year for a U.S. stock market fund. Yet that fee often hinders performance. It is difficult to beat a broad-based benchmark like the S&P 500 when you’re consistently two per cent behind.

That said, its U.S. mutual fund version of J.P. Morgan’s JCOR ETF did so well because its MER, or management expense ratio (average annual fee cost), is 0.4 per cent. The Canadian ETF, by the way, charges 0.44 per cent as an annual fee.

Still, a Winnipeg portfolio manager specializing in ETF strategies for private clients is skeptical the growing trend of actively managed ETFs will benefit investors.

“I’ve heard the same argument for decades that passive ETFs may not work because of the environment we’re in,” says Alan Fustey, portfolio manager with Bellwether Investment Management.

The premise ‘this time will be different’ and active managers will rise to the challenge is constantly bandied about by the industry, but it rarely materializes consistently, says Fustey.

That’s simply because it is incredibly hard for even professionals to beat big, broad markets like the S&P 500 and the TSX Composite Index. With passive investing, you are just trying to capture the market performance for a low cost, today often less than 0.10 per cent.

“The reason it’s so hard to outperform those indices is that everyday winners get marked up and losers get marked down,” he says. “And no one can predict which shares are going to be the winners long-term and which ones will be the losers long-term.”

Of course, don’t expect the debate to die. But you can expect more active ETF launches, especially as investors fret about what lies ahead, Rana says.

“We believe active management can play a pivotal role in this environment.”

Joel Schlesinger is a Winnipeg-based freelance journalist

joelschles@gmail.com