Behavioral Finance Identifying and Exploiting Emotion driven Market Anomalies February 2014 Joshua Chisari Executive Director Client Portfolio Manager 212-648-0142 joshua.m.chisari@jpmorgan.com
Agenda Emotion driven investing behaviors and common pitfalls Short-term performance driven flows Misperception of risky assets Investors tend to buy at the peak and sell at the troughs of an alpha cycle Consumer confidence vs. forward returns Behavioral Finance investing Behavioral finance explained Why it works Product highlights 1
The common pitfalls of emotion driven investing Structured Small Cap Core 2500 STRICTLY PRIVATE/CONFIDENTIAL FOR INSTITUTIONAL USE ONLY
Bad investor behavior U.S. Equity Fund Flows and Market Performance Billions USD, US Equity Funds, quarterly $120 Tech bubble $100 Equity Flows Trailing 12M return: 17.9% Forward 12M return: -21.7% Forward 36M return: -16.1% Sovereign debt crisis Trailing 12M return: 1.1% Forward 12M return : 26.2% Forward 36M return:? S&P 500 2000 1800 $80 1600 $60 1400 $40 1200 $20 1000 $0 -$20 -$40 Tech bust & 9/11 Trailing 12M return:-20.5% Forward 12M return: 24.4% Forward 36M return: 16.7% Lehman bankruptcy Trailing 12M return: -37.0% Forward 12M return: 26.5% Forward 36M return: 14.1% 800 600 -$60 400 -$80 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 200 The charts and/or graphs shown above and throughout the presentation are for illustration and discussion purposes only. Source: J.P. Morgan Asset Management; FactSet, ICI Data includes flows through December 2012 and excludes ETFs. *Sovereign debt crisis as of 09/30/2011 3
hurts investor returns January 1, 1991 through December 31, 2012 12% 10% 10.29% 1.49% Average excess return, 25 %-ile manager 8% 6% 4% 8.80% 3.49% 2% 0% S&P 500 Index Avg equity investor Source: Dalbar; evestment Analytics. Competitive universe: ea US Large Cap Core Equity Based on annualized returns 4
Excess returns a look back Top quartile managers by style, trailing 3-year excess returns 18% 16% Top Quartile Excess Returns: Average Latest Large Cap Core 2.96% 1.15% Large Cap Growth 4.51% 1.14% Large Cap Value 2.84% 1.37% 14% 12% 10% 8% 6% 4% 2% 0% -2% 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 Large Cap Core Large Cap Growth Large Cap Value Source: evestment Analytics. As of December 31, 2013. Based on annualized returns. Excess returns are calculated against the following benchmarks: Large Cap Core: S&P 500 Index; Large Cap Value: Russell 1000 Value Index; and Large Cap Growth: Russell 1000 Growth Index 5
Risky assets provide greater upside and less downside at longer investment horizon 120% Risky assets provide greater upside and less downside at longer investment horizon Range of Stock, Bond and T-bills Total Returns Annual total returns, January 1950 December 2013 Equity Small Companies 100% 97.6% Equity Large Companies Corporate Bonds 80% Government Bonds 30 Day T- Bill 60% 61.0% 54.4% 40% 20% 0% -20% 46.7% 15.2% 0.1% -18.2% -17.1% 44.5% 33.4% 25.4% 23.8% 12.6% -6.9% 0.1% -6.0% -16.1% -21.3% 39.8% 29.7% 24.6% 23.9% 11.1% -6.6% -2.3% -12.3% -3.3% 0.6% 30.6% 21.4% -3.4% 3.2% 16.9% 0.6% 16.3% -0.1% 9.2% 0.4% 21.9% 18.3% 13.0% 12.7% 7.7% 8.1% 0.5% 3.8% 0.4% 1.3% 20.2% 14.8% 11.4% 8.8% 6.8% 11.2% 7.8% 1.8% 1.4% 0.9% -40% -60% -45.9% -43.3% 1-yr. 3-yr. rolling 5-yr. rolling 10-yr. rolling 20-yr. rolling 30-yr. rolling Asset Sources: Ibbotson, J.P. Morgan Asset Management., Data are as of 12/31/13
Taking near term Risk creates long term Opportunity The risky return profile for risky assets further magnified in the long run Range of Stock, Bond and T-bills Total Returns Annual total returns, January 1950 December 2013 120% 100% 80% 60% 40% 97.6% 61.0% 46.7% Equity Small Companies Equity Large Companies Corporate Bonds Government Bonds 30 Day T- Bill 54.4% 20% 20.2% 14.8% Return (12/31/1983-12/31/2013) Growth of $100,000 over 30 years Small Companies 11.27% $2.33 M Big Companies 11.07% $2.46M Corporate Bonds 9.40% $1.48 M Government Bonds 9.41% $1.49 M 30 day T-bills 4.03% $327 K Inflation ( Headline CPI) 2.82% 20% 15.2% 11.2% 11.4% 0% -20% -18.2% -17.1% 0.1% 8.8% 7.8% 5.9% -40% -60% -45.9% -43.3% 1-yr. 0% 1.8% 1.4% 30-yr. rolling 0.9% Sources: Ibbotson, J.P. Morgan Asset Management. Data are as of 12/31/2013
Consumer Confidence and the Stock Market 30 GTM U.S. Economy Source: University of Michigan, FactSet, J.P. Morgan Asset Management. Peak is defined as the highest index value before a series of lower lows, while a trough is defined as the lowest index value before a series of higher highs. Subsequent 12-month S&P 500 returns are price returns only, which excludes dividends. Impact on consumer sentiment is based on a multivariate monthly regression between 1/31/2000 8/31/2013. Guide to the Markets U.S. Data are as of 9/30/2013.
Behavioral Finance explained Structured Small Cap Core 2500 STRICTLY PRIVATE/CONFIDENTIAL FOR INSTITUTIONAL USE ONLY
What is behavioral finance? Theory: Behavioral finance is the study of how psychology impacts the financial decision making process Implications: By better understanding investor behavior, it is possible to identify and capitalize on emotion driven market anomalies 10
The origins of human irrationality.. Emotion (primitive brain*) Logic (analytic brain*) * The emotional part of brain is driven by the limbic system, while the logical part is called the cerebral cortex 11
Theory of Behavioral Finance Nobel Prize Winner Daniel Kahneman the first non-economics major to win a Nobel Prize in Economics in 2002 Validation that emotion can effect the financial decision making process Prospect Theory Investors feel the pain of a loss, 2-3 times as much as they confer a benefit from a gain Human emotions impact the decision making process! 12
Fair Value vs. Irrational Value Greed Fair value Valuation Current Value Fear I will tell you how to become rich. Be fearful when others are greedy. Be greedy when others are fearful. - Warren Buffett Time 13
Common pitfalls Overconfidence Anchoring Representativeness Confirmation bias ADD bias Herd mentality 14
Overconfidence Overestimating or exaggerating one's ability to successfully perform a particular task 81% of new business owners think their business has at least a 70% chance of success, but only 39% think any business identical to theirs would likely succeed 68% of lawyers in civil cases believe their side will prevail 80% of students think they will finish in the top half of their class Analysts are over-confident in their earnings estimates of companies they like, however, their estimates are revised 2x more frequently in the second half of the year to play catch up to reality Ask yourself: What am I missing? Source: T2 Partners LLC 15
Anchoring Human tendency to rely too heavily, or "anchor," on historical data when making decisions Apple Computer Inc. (AAPL-US) Surprise History - EPS Estimate Range Actual 0.35 0.30 Apple s stock performance since 2004 provides an example of Behavioural Finance anomalies (Anchoring/Overconfidence) where analysts under react to new information when revising forecasts Apple launched the ipod in 2002, selling 400,000 units that year. Sales in 2003 were 900,000 followed by 4.5m in 2004 and 22m units in 2005 Analysts were slow to catch onto the new product momentum as evident from the earnings surprise chart, providing significant outperformance for Apple stockholders in 2003, 2004 and 2005 We identified Apple as an attractive stock due to positive earnings revisions and improving price momentum in 2004 Follow the data 0.25 0.20 0.15 0.10 0.05 0.00 9/03 12/03 3/04 6/04 9/04 12/04 3/05 6/05 9/05 Data Source: IDC / Exshare Apple Computer Inc. (AAPL-US) Daily from 30-Sep-2003 to 30-Dec-2005 U.S. Dollar (Split / Spin-off - Adjusted) 2003 2003 Apple 49% Apple 49% S&P 26% S&P 26% 2004 2004 Apple 201% Apple 201% S&P 9% S&P 9% High: 74.98 Low: 9.85 Last: 71.89 2005 80 2005 70 Apple Apple 123% 123% 60 S&P S&P 3% 3% 50 9/03 12/03 3/04 6/04 9/04 12/04 3/05 6/05 9/05 12/05 40 30 20 10 Data Source: IDC / Exshare The above security is shown for illustrative purposes only. It is not to be interpreted as a recommendation to buy or sell. 16
Representativeness Representativeness involves looking at a small data set and extrapolating information to draw erroneous conclusions Macy s completed a series of acquisitions in 2005 which materially impacted their balance sheet Write-downs and depreciation related to these acquisitions impacted earnings per share measures This did not influence cash flows where Macy s presented an attractive value A good company is not necessarily a good stock For illustrative purposes only The inclusion of the securities mentioned above is not to be interpreted as recommendations to buy or sell. 17
Confirmation bias People tend to favor information that confirms their preconceptions or hypotheses regardless of whether the information is true Look and thoroughly consider disconfirming evidence 18
ADD bias Focusing on the short term can be counterproductive A month can feel like an eternity Don t stare at the Bloomberg screen all day Create alerts to major stock moves 19
Herd mentality Human tendency for individuals to mimic the actions (rational or irrational) of a larger group Most often occurs due to a fear of being unconventionally wrong People think being a contrarian is riskier to your career Contrarian investment ideas never feel good 20
Tips to combat the influence of emotion Identify your investment philosophy & process and stick with it Write down your rules Actively seek out contrary opinions Admit and learn from mistakes (Learn lessons from your mistakes but don t obsess) Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing. -Warren Buffett 21
Why Behavioral Finance investing works Structured Small Cap Core 2500 STRICTLY PRIVATE/CONFIDENTIAL FOR INSTITUTIONAL USE ONLY
Value investing why it works Behavioral Finance Anomaly Cheap stocks outperform expensive ones Value, 1997 2013 Relative return 15.0 11.6 10.0 8.0 6.1 5.0 1.9 0.7 0.0 1 2 3 4 5 6 7 8 9 10-1.1-5.0-3.3-5.6-7.0-10.0-10.0-15.0 Attractive valuation Expensive valuation Behavior Investors are overly optimistic about past winners, and overly pessimistic about past losers Theories Over-confidence/over-pessimism Representativeness References De Bondt, W. & Thaler, R. (1985). Does the Stock Market Overreact? Journal of Finance, 40, 793 805 Lakonishok, J., Shleifer, A. & Vishny, R.W. (1994) Contrarian Investment, Extrapolation and Risk, Journal of Finance, 49, 1541 1578 Source: Factset. The above charts are shown for illustrative purposes only. Charts show relative performance of the stocks in Russell 2000 assigned to deciles on the basis of our proprietary value factors. The test period is from 1997 through 2013 November, deciles are rebalanced monthly. Decile performance results have certain inherent limitations. Unlike an actual performance record, decile results do not represent actual trading, liquidity constraints, fee schedules and transaction costs. Past performance is not indicative of future results. Total return assumes the reinvestment of income. 23
Momentum investing why it works Behavioral Finance Anomaly Stocks with improving earnings expectations outperform Momentum, 1997 2013 15.0 Behavior Analysts under react to new information when revising their forecasts Theories Anchoring Confirmation bias 10.0 9.9 Under-reaction Relative return 5.0 0.0-5.0-10.0 4.7 2.4 1.5 1 2 3 4 5 6 7 8 9 10-0.6-2.9-0.9-2.2-3.5-8.7 Improving momentum Deteriorating momentum References Jegadeesh, N. & Titman, S. (2005). Momentum, In Advances in Behavioral Finance, Volume II, 353 388 Bernard, V.L. (1992) Stock price reactions to earnings announcements, In Advances in Behavioral Finance, 303 340 Source: Factset. The above charts are shown for illustrative purposes only. Charts show relative performance of the stocks in Russell 2000 assigned to deciles on the basis of our proprietary momentum factors. The test period is from 1997 through 2013 November, deciles are rebalanced monthly. Decile performance results have certain inherent limitations. Unlike an actual performance record, decile results do not represent actual trading, liquidity constraints, fee schedules and transaction costs. Past performance is not indicative of future results. Total return assumes the reinvestment of income. 24
Quality investing why it works Behavioral Finance Anomaly Stocks with high quality management teams outperform Earnings quality, 1997 2013 Relative return 5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0 4.4 1.7 2.4 0.7 1 2 3 4 5 6-0.4 7 8 9 10-1.4-1.0-2.3 0.2 Behavior Corporate management tends to be overconfident in their ability. This often leads to overpaying for mergers & acquisitions and excessive spending on capital intensive projects that can be dilutive to shareholder value. Theories Overconfidence References Richard H. Thaler. (1994). The Winner's Curse: Paradoxes and Anomalies of Economic Life. -4.0-5.0-4.5 High quality earnings Low quality earnings Source: Factset. The above charts are shown for illustrative purposes only. Charts show relative performance of the largest 1,000 stocks assigned to deciles on the basis of our proprietary earnings quality factors. The test period is from 1997 through 2013 February, deciles are rebalanced monthly and stocks are equal weighted. Decile performance results have certain inherent limitations. Unlike an actual performance record, decile results do not represent actual trading, liquidity constraints, fee schedules and transaction costs. Past performance is not indicative of future results. Total return assumes the reinvestment of income. 25
Product highlight Structured Small Cap Core 2500 STRICTLY PRIVATE/CONFIDENTIAL FOR INSTITUTIONAL USE ONLY
Performance Summary- Small and Mid Caps (net of fees) As of December 31, 2013 Three One Three Five Ten Since Inception Months Year Years Years Years Inception Date QDV Small Cap Core 9.77% 42.10% 18.77% 23.78% N/A 9.79% 11/30/05 Russell 2000 Index 8.72% 38.82% 15.67% 20.08% N/A 8.39% Excess 1.05% 3.28% 3.10% 3.70% N/A 1.40% Morningstar Ranking 44 26 16 15 N/A 16 QDV Small Cap Value 8.54% 37.96% 17.64% 21.03% N/A 9.41% 12/31/04 Russell 2000 Value Index 9.30% 34.52% 14.49% 17.64% N/A 7.19% Excess -0.76% 3.44% 3.15% 3.39% N/A 2.22% Morningstar Ranking 78 46 16 50 N/A 38 TMV Small Cap Core 10.45% 43.81% 18.69% 21.60% 10.00% 9.65% 12/31/98 Russell 2000 Index 8.72% 38.82% 15.67% 20.08% 9.07% 8.42% Excess 1.73% 4.99% 3.02% 1.52% 0.93% 1.23% Morningstar Ranking 26 15 19 41 N/A 49 08/31/2004* TMV Small Cap Value 10.71% 43.62% 43.62% 19.96% 21.16% 12.20% 03/31/97 Russell 2000 Value Index 9.30% 34.52% 34.52% 14.49% 17.64% 10.13% Excess 1.41% 9.10% 9.10% 5.47% 3.52% 2.07% Intrepid Mid Cap 9.98% 41.33% 18.15% 22.23% N/A 10.10% 12/31/2004 Russell MidCap Index 8.39% 34.76% 15.88% 22.36% N/A 9.16% Excess 1.59% 6.57% 2.27% -0.13% N/A 0.94% Morningstar Ranking 22 21 22 26 N/A 31 Past performance is not a guarantee of comparable future results. Total return assumes the reinvestment of income. 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 individual portfolio security selection and the applicable fee schedule. Fees are described in Part II of the Advisor s ADV which is available upon request. 27
Performance Summary- Large Caps (net of fees) As of December 31, 2013 Three One Three Five Ten Since Inception Months Year Years Years Years Inception Date Intrepid America 11.33% 35.69% 17.36% 19.39% 8.73% 11.59% 02/28/03 Russell 1000 Index 10.23% 33.11% 16.30% 18.59% 7.78% 10.19% Excess 1.10% 2.58% 1.06% 0.80% 0.95% 1.40% Morningstar Ranking 14 24 18 21 24 17 Intrepid Growth 11.98% 35.44% 17.54% 20.76% 9.15% 11.64% 02/28/03 Russell 1000 Growth Index 10.44% 33.48% 16.45% 20.39% 7.83% 10.11% Excess 1.54% 1.96% 1.09% 0.37% 1.32% 1.53% Morningstar Ranking 16 44 24 36 34 32 Intrepid Value 11.74% 36.55% 17.66% 18.56% 9.55% 12.28% 02/28/03 Russell 1000 Value Index 10.01% 32.53% 16.06% 16.67% 7.58% 10.13% Excess 1.73% 4.02% 1.60% 1.89% 1.97% 2.15% Morningstar Ranking 5 16 14 21 12 9 Intrepid Advantage 10.76% 36.62% 18.62% 20.62% 8.95% 11.98% 02/28/03 Russell 3000 Index 10.10% 33.55% 16.24% 18.71% 7.88% 10.39% Excess 0.66% 3.07% 2.38% 1.91% 1.07% 1.59% Morningstar Ranking 26 19 8 11 27 20 Past performance is not a guarantee of comparable future results. Total return assumes the reinvestment of income. 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 individual portfolio security selection and the applicable fee schedule. Fees are described in Part II of the Advisor s ADV which is available upon request. 28
Biographies Joshua Chisari, executive director, is the head of the Client Portfolio Manager Team for US Behavioral Finance. The team is responsible for communicating strategy, outlook and investment performance to the firm's clients and prospects as well as the internal sales force. An employee since 2011, Josh joined Asset Management from UBS Global Asset Management where he was head of Client Portfolio Management for UBS s Global Growth Equity Platform. Prior to UBS Josh was a Senior Product Specialist for J&W Seligman and prior to that he was a sell side analyst, covering Closed End Equity Funds for Morgan Stanley. He obtained a B.S. in Business Administration from Concordia College. 29
J.P. Morgan Asset Management Contact JPMorgan Distribution Services, Inc. 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. This document is intended solely to report on various investment views held by J.P. Morgan Asset Management. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Indices do not include fees or operating expenses and are not available for actual investment. The information contained herein employs proprietary projections of expected returns as well as estimates of their future volatility. The relative relationships and forecasts contained herein are based upon proprietary research and are developed through analysis of historical data and capital markets theory. These estimates have certain inherent limitations, and unlike an actual performance record, they do not reflect actual trading, liquidity constraints, fees or other costs. References to future net returns are not promises or even estimates of actual returns a client portfolio may achieve. The forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. 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. There is no assurance that behavioral finance strategies will protect against the loss of capital. Equity Risks: The strategy is subject to management risk and may not achieve its objective if the adviser s expectations regarding particular securities or markets are not met. The price of equity securities may rise or fall because of changes in the broad market or changes in a company s financial condition, sometimes rapidly or unpredictably. These price movements may result from factors affecting individual companies, sectors or industries selected for a portfolio or the securities market as a whole, such as changes in economic or political conditions. When the value of a portfolio s securities goes down, your investment will decreases in value. The manager may use derivatives in connection with its investment strategies. Derivatives may be riskier than other types of investments because they may be more sensitive to changes in economic or market conditions than other types of investments and could result in losses that significantly exceed the strategy s original investments. Certain derivatives may give rise to a form of leverage. As a result, the strategy may be more volatile than if the strategy had not been leveraged because the leverage tends to exaggerate the effect of any increase or decrease in the value of the portfolio s 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 to a portfolio, and the cost of such strategies may reduce a portfolio s returns. Derivatives would also expose a portfolio to the credit risk of the derivative counterparty. In cases where performance results are presented gross of investment management fees. The deduction of an advisory fee reduces an investor s return. Actual account performance will vary depending on individual portfolio security selection and the applicable fee schedule. Fees are available upon request. Illustration showing impact of investment management fees: An investment of USD $1,000,000 under the management of JPMFAM achieves a 10% compounded gross annual return for 10 years. If a management fee of 0.75% of average assets under management were charged per year for the 10 year period, the annual return would be 9.25% and the value of assets would be USD $2,422,225 net of fees, compared with USD $2,593,742 gross of fees. Therefore, the investment management fee, and any other expenses incurred in the management of the portfolio, will reduce the client s return. Any securities/portfolio holdings mentioned throughout the presentation are shown for illustrative purposes only and should not be interpreted as recommendations to buy or sell. A full list of firm recommendations for the past year are available upon request. 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, J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc. Copyright 2013 JPMorgan Chase & Co. 30
JPMorgan Asset Management This document is intended solely to report on various investment views held by JPMorgan Asset Management. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Indices do not include fees or operating expenses and are not available for actual investment. The information contained herein employs proprietary projections of expected returns as well as estimates of their future volatility. The relative relationships and forecasts contained herein are based upon proprietary research and are developed through analysis of historical data and capital markets theory. These estimates have certain inherent limitations, and unlike an actual performance record, they do not reflect actual trading, liquidity constraints, fees or other costs. References to future net returns are not promises or even estimates of actual returns a client portfolio may achieve. The forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. Small- and mid-capitalization portfolios typically carry more risk than stock funds investing in well-established blue-chip companies because 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. Equity Risks: The strategy is subject to management risk and may not achieve its objective if the adviser s expectations regarding particular securities or markets are not met. The price of equity securities may rise or fall because of changes in the broad market or changes in a company s financial condition, sometimes rapidly or unpredictably. These price movements may result from factors affecting individual companies, sectors or industries selected for a portfolio or the securities market as a whole, such as changes in economic or political conditions. When the value of a portfolio s securities goes down, your investment will decreases in value. The manager may use derivatives in connection with its investment strategies. Derivatives may be riskier than other types of investments because they may be more sensitive to changes in economic or market conditions than other types of investments and could result in losses that significantly exceed the strategy s original investments. Certain derivatives may give rise to a form of leverage. As a result, the strategy may be more volatile than if the strategy had not been leveraged because the leverage tends to exaggerate the effect of any increase or decrease in the value of the portfolio s 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 to a portfolio, and the cost of such strategies may reduce a portfolio s returns. Derivatives would also expose a portfolio to the credit risk of the derivative counterparty. The value of investments and the income from them may fluctuate and your investment is not guaranteed. Past performance is no guarantee of future results. Please note current performance may be higher or lower than the performance data shown. Please note that investments in foreign markets are subject to special currency, political, and economic risks. 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 your 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. 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 individual portfolio security selection and the applicable fee schedule. Fees are available upon request. 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 million, gaining an annual return of 10% per annum would grow to $259 million after 10 years, assuming no fees have been paid out. Conversely, a portfolio with a beginning value of $100 million, gaining an annual return of 10% per annum, but paying a fee of 1% per annum, would only grow to $235 million after 10 years. The annualized 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 million 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. The securities mentioned throughout the presentation are shown for illustrative purposes only and should not be interpreted as recommendations to buy or sell. A full list of firm recommendations for the past year are available upon request. Securities may be offered by J.P. Morgan Institutional Investments Inc., member NASD and SIPC JPMorgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co and its affiliate worldwide. Copyright 2013 JPMorgan Chase & Co. All rights reserved. FOR INSTITUTIONAL USE ONLY NOT FOR PUBLIC DISTRIBUTION 31