JPMorgan Asset Management's Global CEO on ETFs, the Magnificent Seven, and its US$500 million tech investment

When you lead an organisation that manages over US$3 trillion in assets under management, the future of finance is naturally a very pressing question. For JPMorgan Asset Management Global CEO George Gatch, preparing for the future of finance (while staying on top of today's markets) involves a humongous investment in technology.

So how does Gatch think about the rise of AI, the company's huge active ETF push into the Australian market and the opportunities in today's environment?

Market Index was extremely fortunate to be one of just a few Australian organisations able to ask questions of Gatch. This wire will feature his responses to our questions in these fields.

On the value of active management in markets

There is little doubt that the Magnificent Seven's valuations in particular are stretched. But what for the rest of the market?

"When you look at the rest of the S&P 500, it's trading at a slight discount to history. There is dispersion and that creates opportunities for active management," Gatch says.

Source: Market Index, S&P

Beyond the Magnificent Seven, Gatch calls out the opportunities in select parts of the US equity market.

"Value and value-oriented stocks traded at more of a discount. For long-term investment opportunities, the same is true on a market capitalisation basis where the largest cap stocks have been the ones that have benefited the most in the recent rallies, and therefore, extending into mid and small-caps over the long term is going to provide opportunities," he notes.

Gatch also calls out the resetting of yields and rates in the global fixed income market - and the opportunities that now open for investors.

"[There is] an opportunity to exploit active management in that space where credit research in markets gives you a big opportunity and access to sectors that you simply don't see in the indices," Gatch says.

"The indices are quite inefficient in fixed income markets because they tend to represent the most indebted companies of the highest proportion of the indices. There's a great opportunity to leverage that where you have fundamental credit research into making more informed decisions," he adds.

The two biggest challenges coming for markets

While the risks to markets are well-worn, Gatch calls out two risks in particular.

"An oil shock to the global economy is something that could have a big impact on recessions," he says.

'The other risk that is not priced into the market ... is the potential that inflation is just stickier. That could mean rates that are higher for longer or you could have a shock to the system which would mean an increase in rates. That would have other impacts that could cascade elsewhere into the economy, commercial real estate and other sectors of the market. I think a small percentage of risk but it is nevertheless out there," he adds.

On the future of finance (AI, ETFs, and more!)

JPMorgan Asset Management has made huge moves in the Australian ETF market over the last couple of years - and we've profiled some of its recent launches here and here. And Gatch says there is more to come.

"I think there's still a huge opportunity for investors to exploit active investing in ETFs - and I think that's at the very beginning," Gatch says.

"If you look at ETFs today, there's a little over $2 trillion in fixed income. 90% of that is indexed and passive. But this is a space where active managers on average outperform fixed income indices. And if you invest in a [passive] fixed-income ETF, you're missing a third of the total US bond market," he adds.

The group has also made huge investments in its technology - US$500 million in annual investment alone. Technology investments are being made in such things as generative AI (a tool called SpectrumGPT is being used to analyse earnings summaries and research notes at the click of a button!), personalised separately managed account (SMA) and taxation advice, and advances in sustainable investing.

"When you think about the power of technology and the innovations and how that's driven the markets and technology stocks themselves, those impacts to our business are very fundamental," Gatch says.

"I would say the most important long-term investment that we're making besides in our talent is technology - $500 million a year just in asset management, 1500 technologists, we're spending 10% more this year than we did last year in building out our technology capabilities."

"Over the next 5 to 10 years, the impact of productivity levels for portfolio managers and research analysts, and the tools we're making available to investors through our websites around the world will be pretty fundamental to our business," he adds.