Behavioral-Finance-at-JPMorgan

N9-207-084JANUARY18,2007________________________________________________________________________________________________________________ProfessorMalcolmBakerandResearchAssociateAldoSesia,Jr.oftheGlobalResearchGrouppreparedthiscase.HBScasesaredevelopedsolelyasthebasisforclassdiscussion.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationsofeffectiveorineffectivemanagement.Copyright©2006PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.MALCOLMBAKERALDOSESIAJR.BehavioralFinanceatJPMorganBehavioralfinanceisthestudyofhowinvestorsmakedecisions—andhowthesedecisionsaffectstockpricesandbroadmarketmovements.Investorsarehuman,andhumansaren’tperfectlyrational.Whentheybuyonemotion,theynotonlyjeopardizetheirowninvestmentplans,butalsocreateopportunitiesforothersinthemarket.1Inthethreeyearssincea2003launchintheUnitedStates,JPMorgan’sbehavioralfinanceproductshadattractednewassetsatarapidpace.TheAssetManagementunitatJPMorganhadbeenapioneerinwhatittermed“BehavioralInvesting.”Ithadoveradecadeofexperiencesince1992whenitofferedaninitialretailproductintheUnitedKingdom.2Inthelate1990s,JPMorganofferedawiderrangeofmutualfundsintheU.K.andEurope,andbegantofocusitseffortsonthelargerU.S.market.Ontheinvestmentside,ChrisComplin,chiefinvestmentofficer(CIO)forbehavioralfinanceproductsglobally,hadallfivenewproductsinthetop20%oftheirLippercategories.3Thisprovidedconfirmationforaconceptthat’sbeensuccessfullyappliedinternationally.OnthebusinesssideoftheAssetManagementunit,RichardChambers,theheadofU.S.andEuropeanmarketing,hadgiveninvestorpsychologyacentralroleinthebrandingofthenewfunds.TheideathatwelldocumentedbehavioralbiasescouldcreateopportunitiesforJPMorgan’sinvestmentmanagersseemedtoresonatewithretailinvestors.1JPMorganAssetManagement,BehavioralFinanceStrategies:WhatItMeanstoInvestinJPMorganIntrepidFunds.2Foundedbyacademicsintheearly1990s,LSVAssetManagementandFullerandThalerAssetManagementalsohadadistinctlybehavioralfinanceapproach.FullerandThalerfundsweredistributedbyJPMorganundertheirUndiscoveredManagersbrand.However,mostoftheirassetsundermanagementwerefrominstitutions,notretailinvestorsandbrokers,suchasMerrillLynchandSmithBarney.TheDremanfunds,distributedbyDWSScudder,werethemainretailcompetitionintheUnitedStates.,withlarge,mid-cap,andsmallvaluefundofferings.Manyotherassetmanagers,whilenotappealingexplicitlytobehavioralfinance,nonethelessappealedtoinvestorpsychologyasabasisforgeneratingaboveaveragereturnsorusedquantitativestrategies,groundedininvestorunderreactionandoverreactiontoinformation.3Thisperformancewasforthemostrecent1-yearand3-yearperiods.Source:JPMorgan,IntrepidStrategies:SecondQuarter2006.FORFINANCIALPROFESSIONALUSEONLY/NOTFORPUBLICDISTRIBUTION207-084BehavioralFinanceatJPMorgan2Competingassetmanagersusedsimilarinvestingprinciples,butfewhadgoneasfarinembracingpsychologyandbehavioralfinanceintheretailmarket.Sofar,JPMorgan’sapproachhadbeensuccessful.Bythethirdquarterof2006,totalassetsundermanagementinU.S.fundshadrisenfrom$100millioninthefirstquarterof2003toover$20billion.Overall,JPMorgannowmanagedmorethan$76billioninbehavioralstrategiesworldwide.ThechallengewasforComplintocontinuethewinningstreakonalargerscale,astheyhaddoneacrossEurope,evenascompetitionfromotherinvestmentmanagersintensified.And,forChambers,thegoalwastosolidifyJPMorgan’sbehavioralfinancebrandwithretailbrokers.JPMorganJPMorganChase&Co.wasaleadingglobalfinancialservicesfirmwithassetsof$1.3trillionandoperationsinmorethan50countries.4Thecompany’searliestpredecessororganizationdatedbackto1799.KeytransactionswhichledtotheformationofJPMorganChaseincludedthe2000mergerbetweenJPMorganandChaseManhattan,combiningfourofthelargestandoldestmoneycenterbankinginstitutionsinNewYorkCity(JPMorgan,Chase,Chemical,andManufacturersHanover)intoonefirm.In2004,thecompanymergedwithBankOneandacquiredHighbridgeCapitalManagement,aNewYork-basedhedgefundwith$7billionundermanagement.5Thecompanywasorganizedintosixmajorbusinesssegmentsunderthreebrands:TheInvestmentBankandAssetWealthManagement(JPMorganbrand),Treasury&SecuritiesServices(JPMorganChasebrand),CommercialBank,CardServices,andRetailFinancialServices(ChaseBrand).(SeeExhibit1forfinancialsummary.)UndertheJPMorganbrand,theInvestmentBankprovidedclients—corporations,financialinstitutions,governmentsandinstitutionalinvestorsworldwide—withmergerandacquisitionadvice,capitalraising,restructuring,riskmanagementandresearch.Inaddition,thebankparticipatedinproprietarytradingandinvestingandmarket-makingincashsecuritiesandderivativeinstrumentsaroundtheworld.Also,undertheJPMorganbrandwastheAsset&WealthManagementsegmentdescribedbelow.UndertheJPMorganChasebrand,Treasury&Securitie