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(David Stubbs): Thank you, operator. Hello everybody, welcome to the second in our CIO audio class series. My name is (David Stubbs). I'm head of Market Strategy, and Advice for JP Morgan’s International Private Bank. And I'm joined today again by (Stuart Edginton), who is head of specialists for our CIO team (Stuart), last time we heard that our CIO program has been performing very well in recent years, and especially through the volatility we've experienced this year. Can we infer something structural from this?
(Stuart Edginton): Yes, I think (David), and we certainly step out to differentiate what we're doing in the private bank. So, a few years ago, (Richard Madigan), our CIO, he decided to change the structure as such that he brought in an institutional specialists from outside of the bank into the private bank. So, that is structurally what you would see more in an asset management type business, rather than a private bank. So, that fundamentally is something different.
(David Stubbs): Right, and it terms of this new team with our defensive structure, in terms of their approach, how would you describe that?
(Stuart Edginton): Again, I think there's been lots of developments in the industry since the financial crisis. And many would have gone, you know, more to a robo-systematic type strategy whereby you look at indicators in the market, and the model tells you to head in a certain direction. I'd say we've gone in somewhat of an opposite direction to that. We're obviously aware of all those things, and we look at trends and flows and these sorts of things. But, the key point is that we stay fundamentally unfazed. So, we do our own research. We talk to the management of the companies we invest in. We're doing that proprietary work. And so, we're always looking to try and find trends or valuations before something changes in the market. So, for example, last year, we actually sold all our high-yield positions within fixed income early in the year when spreads were around 350 basis points, which resales off a little, you know, very little room actually for loan loss, et cetera. And sure enough, that has proved a good decision, in that we didn't need to do much in Q1 of this year when spreads began to widen out. And we've seen the default rates, et cetera, picking up as a result of what's going on at the moment. But, when spreads went out to say it got to around about 1000 basis points, we actually reentered the position, because we felt that now looked like offering some fundamental value. So, that's how we try and get ahead of the market rather than relying on say systematic drivers.
(David Stubbs): Now, as you just laid out, it's obviously very important to identify those trends, and take the positioning around them. But, once you've decided what to do it's - also how you do it is also very important. So, I understand that the way you've implemented your decisions in portfolios has radically changed recently. Take us through that.
(Stuart Edginton): Yes, absolutely. So, going back a few years, what we'd have done is we'd have decided on the areas we like in the market, the countries, et cetera, et cetera. And we'd have picked our favorite active manager with a good track record. What we've done instead is because of the significant growth in the ETF market, the granularity of it, the availability of ETF, we now actually think of breaking down world equities, for example, into building blocks using ETF. So, you know, we can now choose our country best using ETF, which has always been the case actually, we can now get sectors within each of those countries vets. And perhaps crucially we can also now pick factors which you can implement with ETF. So, the entire equity relist, we can now do through granular ETFs.
(David Stubbs): So, obviously, when we look at some of the factors, and, you know, other elements you're playing there, geographic sector decks, those factors themselves that may be an unfamiliar term to some of our listeners. Break down exactly what you mean by factors.
(Stuart Edginton): Yes, I mean, in other words it’s simply style. So, you might go to a manager and you hear they've got a quality style, which whereby they might focus on the balance sheet and consistency of earnings. Or they might have a value style. So, they're looking for perhaps more fixable areas which have underperformed, and they're looking to catch up the valuation. I think, go back a few years ago, you'd had to have accessed those kind of styles through active managers. But now they're saying they can be replicated through an index. You can very simply switch between those depending on which point in the cycle you were at. So, you know, in recent years we've rotated actually from value, to quality, and we're now actually looking back at some value areas of the market.
(David Stubbs): And I'm sure you’ve been referring to equities. What about fixed income?
(Stuart Edginton): Yes, it's a similar approach to a large extent and we're looking to get certain areas of the market through very targeted (unintelligible) vehicles. But, this is an area where I think liquidity is more important and can be more challenged. And so, therefore, whether areas of the market so if we do want to go back into the high yield or securitize, or something like that, which is a bit more specialist, in those circumstances we might then go and use an active manager who's experienced in it, who's got the liquidity, so even the fixed income side we might see more of a mix of some (unintelligible) exposure, some simple exposure, and less liquid areas, we might use an active manager.
(David Stubbs): Okay, right. So, when we look at the entire portfolio today, can you give us an example of a position that looks maybe contrarian or perhaps something that is very distinct from the positioning we might see elsewhere in the marketplace?
(Stuart Edginton): Yes, sure, I mean, what - so what we're seeing and what we hear, you know, out in the marketplace, you know, a lot of people we're reaching for yields, obviously bond yields are very low. And what that proves was that people took on a lot of credit risk. So, I think one thing that does stand (unintelligible), and I'll go to that example of the high yield, was that through last year, not only did we sell down those lower credit positions, but we also increased the maturity, the duration of our bond exposure. So, that com the start of this year we had around about a duration of about seven years, which is really quite long. And, of course, you know, as yields go down that means that you've got more upsize. So, what it means is - and we've maintained that by the way, substantially, so it means, that what you've got is significant protection with - from your fixed income bucket. Then again, your equity side, which is where you’re really looking to your long-term growth. Now, if that’s wrong or gets challenged, then, you know, we can lean back on the equity - on the fixed income side and that good quality. So, that portfolio construction, I think, is something which has differentiated over these recent, you know, weeks, months, and last couple of years.
(David Sctubbs): Great. Thank you, (Stuart). I think we'll leave at that. I want to thank the (Stuart) for his patience today and thank you for listening to this audio class. If you have any questions about what you've heard today, please contact your JP Morgan representative. Goodbye.
Coordinator: Thank you for joining us. This concludes our call. You may now disconnect.