Risk Management and Target-Date Funds Speakers: John Galateria, Head of North America Institutional, J.P. Morgan Asset Management Dan Oldroyd, Portfolio Manager, J.P. Morgan Asset Management
Participant-controlled risks
Participant-experienced risks
Understanding glide paths and their focus on risk
The importance of dynamic risk management Participants face different magnitudes of risk over time
Longevity risk Median Outcomes Are there risks associated with selecting a to manager versus a through manager? The fund that prioritized longevity risk only provided 6 months of additional income compared to the dynamically managed fund Longevity Risk Source: J.P. Morgan Asset Management and industry prospectuses. The above information are shown for illustrative purposes only. Data based on Monte Carlo simulations used to generate 10,000 different possible portfolio outcomes. Analysis assumed no cash flows prior to retirement and a 10% annual contribution, as well as a constant 6.5% annual withdrawal in retirement.
Market and event risk Expected probability of loss Are low-fee target date funds less risky? More concentrated funds and those with a higher allocation to equities were more likely to suffer losses from market events especially in the critical year before retirement Market & Event Risk Source: J.P. Morgan Asset Management and industry prospectuses. The above information are shown for illustrative purposes only. The results above take each target date fund allocation as presented in the funds prospectus. The indices below are proxies for the underlying asset classes. The information above is not meant to be representative of performance the was achieved by the funds shown above. Data is from 1975 through September 2014 based on index returns. Worst historical loss represents calendar year 2008. Sources: NCREIF, Barclay s Capital Aggregate Index, NAREIT Equity Index, MS REIT Index, S&P 500 Total Return, Russell 2000, Barclays Capital US TIPS Index, Dow Jones UBS Commodities Index, United States T-Bills, MSCI Emerging Markets Free Index, JPMorgan EMBI Global Index.
Interest rate risk Percentage lost with 1% rise in rates What happens if rates rise? Funds that prioritized market and event risk and inflation risk might lose more than double compared with other designs when interest rates rise Concentrated Risk Source: J.P. Morgan Asset Management and industry prospectuses. The above information are shown for illustrative purposes only. The results above take each target date fund allocation as presented in the funds prospectus. The indices below are proxies for the underlying asset classes. The information above is not meant to be representative of performance the was achieved by the funds shown above. Data is from 1975 through September 2014 based on index returns. Sources: NCREIF, Barclay s Capital Aggregate Index, NAREIT Equity Index, MS REIT Index, S&P 500 Total Return, Russell 2000, Barclays Capital US TIPS Index, Dow Jones UBS Commodities Index, United States T-Bills, MSCI Emerging Markets Free Index, JPMorgan EMBI Global Index.
Tying it all together Longevity Risk Market & Event Risk Concentrated Risk
Dynamic risk management Can a dynamic risk approach give me more consistency and less volatility? A dynamic risk management approach appears to deliver more consistent, expected returns across changing market cycles by navigating all of these risks reasonably well, rather than excelling in one area to the detriment of another. Forward-looking glide path performance 10-year historical glide path performance Source: J.P. Morgan Asset Management; data as of September 30, 2014. For illustrative purposes only. Performance is an aggregate of all vintages in the series.
Risk considerations for plan sponsors Know the various risks associated with DC plans Understand that concentrating too heavily on one risk may inherently cause risk in other areas Review the goals and objectives of your plan to understand the risks you want to mitigate Ensure your target date provider s risk philosophy is aligned to the plan s risk objectives Periodically review to ensure that the selected target date fund continues to meet plan goals and objectives
Disclosures The projections utilized throughout are based on J.P. Morgan Asset Management Capital Market assumptions are provided for illustration/discussion purposes only and are subject to significant limitations. Expected or alpha return estimates are subject to uncertainty and error. For example, changes in the historical data from which it is estimated will result in different implications for asset class returns. Expected returns for each asset class conditional on an economic scenario; actual returns in the event the scenario comes to pass could be higher or lower, as they have been in the past, so an investor should not expect to achieve returns similar to the outputs shown herein. References to future returns for either asset allocation strategies or asset classes are not promises of actual returns a client portfolio may achieve. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making a decision. The model cannot account for the impact that economic, market and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact the future returns. The model assumptions are passive only they do not consider the impact of active management. A manager s ability to achieve similar outcomes is subject to risk factors over which the manager may have no or limited control. RISKS ASSOCIATED WITH INVESTING IN THE FUNDS. Certain underlying J.P. Morgan Funds may invest in foreign/emerging market securities, small capitalization securities and/or highyield fixed income instruments. There may be unique risks associated with investing in these types of securities. International investing involves increased risk and volatility due to possibilities of currency exchange rate volatility, political, social or economic instability, foreign taxation and differences in auditing and other financial standards. The Fund may invest a portion of its securities in small-cap stocks. Small-capitalization funds typically carry more risk than stock funds investing in well-established blue-chip companies since smaller companies generally have a higher risk of failure. Historically, smaller companies stock has experienced a greater degree of market volatility than the average stock. Securities rated below investment grade are called high-yield bonds, non-investment grade bonds, below investment-grade bonds or junk bonds. They generally are rated in the fifth or lower rating categories of Standard & Poor s and Moody s Investors Service. Although these securities tend to provide higher yields than higher rated securities, there is a greater risk that the Fund s share price will decline. Real estate funds may be subject to a higher degree of market risk because of a concentration in a specific industry, sector or geographical sector. Real estate funds may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by the borrower. The underlying funds may use derivatives, which are instruments that have a value based on another instrument, exchange rate or index. In addition, the Fund may invest directly in derivatives. Derivatives may be riskier than other types of investments because they may be more sensitive to changes in economic and market conditions than other types of investments and could result in losses that significantly exceed the Fund s or the underlying funds original investments. Many derivatives will give rise to a form of leverage. As a result, the Fund or an underlying fund may be more volatile than if the Fund or the underlying fund had not been leveraged because the leverage tends to exaggerate the effect of any increase or decrease in the value of the Fund s or the underlying funds portfolio securities. Derivatives are also subject to the risk that changes in the value of a derivative may not correlate perfectly with the underlying asset, rate or index. The use of derivatives for hedging or risk management purposes or to increase income or gain may not be successful, resulting in losses, and the cost of such strategies may reduce the Fund s or the underlying funds returns. Derivatives also expose the Fund or the underlying funds to the credit risk of the derivative counterparty. There may be additional fees or expenses associated with investing in a Fund of Funds strategy. TARGET DATE FUNDS. Target date funds are funds with the target date being the approximate date when investors plan to start withdrawing their money. Generally, the asset allocation of each fund will change on an annual basis with the asset allocation becoming more conservative as the fund nears the target retirement date. The principal value of the fund(s) is not guaranteed at any time, including at the target date. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. Contact JPMorgan Distribution Services at 1-800-338-4345 for a fund prospectus. You can also visit us at www.jpmorganfunds.com. Investors should carefully consider the investment objectives and risks as well as charges and expenses of the mutual fund before investing. The prospectus contains this and other information about the mutual fund. Read the prospectus carefully before investing.
Disclosures Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. JPMorgan Funds are distributed by JPMorgan Distribution Services, Inc., which is an affiliate of JPMorgan Chase & Co. Affiliates of JPMorgan Chase & Co. receive fees for providing various services to the funds. Products and services are offered by JPMorgan Distribution Services, Inc., is a member of FINRA/SIPC. J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, JPMorgan Chase Bank N.A., J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc. Copyright 2015 JPMorgan Chase & Co. March 2015