JPMorgan Fleming forms council to share quantitative expertise

NEW YORK — JPMorgan Fleming Asset Management has formed a "global quantitative council," becoming the latest — and largest — manager to jump on the risk-management band wagon.

The new council is headed by Harriett Baldwin, a managing director and head of currency management in the firm's London office. The group will comprise the 50 or so quantitative experts from all of JPMorgan's offices to share ideas and research, said Ms. Baldwin. They will meet three to four times per year and share ideas at other times through e-mail.

"JPMorgan has always had a deep bench of quants who all used to be in stand-alone departments," said Ms. Baldwin. "We rethought that model at the end of the '90s, and then we had quants in each individual department." Ms. Baldwin said when the firm merged with Bank One Corp. last year, it gained several new investment professionals, many of whom were quantitative researchers. In order to incorporate their ideas into the firm, the quant council was formed.

"There's been a lot of good quantitative thinking in our company. The goal here is a simple one: bring together all of these quant thinkers from across the firm who are often working on similar systems from around the world to share ideas and best practices. We believe there's always been strong demand for quantitative management; we've always used a combination of the arts and sciences."

Quantitative managers typically use tight risk controls and multifactor optimization models to develop investment portfolios. Their goal usually is to create an enhanced or structured portfolio that gains incremental returns over a given benchmark, typically in the range of one to five basis points.

JPMorgan is not alone in placing more emphasis on quantitative management. In the past year, firms such as ING Investment Management, New York; Victory Capital Management Inc., Cleveland; and New York Life Investment Management LLC made similar moves.

ING recently set up a centralized research department consisting of five senior quantitative researchers and eight senior fundamental analysts, said Rick Nelson, chief investment officer. Mr. Nelson said the bottom-up researchers work in close harmony with the quants to produce optimized portfolios. The system was developed in February 2004, when the firm hired Christopher Corapi from Federated Investors Inc., Pittsburgh, as head of equity research.

ING's quants use proprietary optimization models to narrow down names of stocks on a sector-by-sector basis, and then the fundamental analysts examine those names to decide whether to invest in them, said Mr. Nelson.

Victory recently hired Northfield Information Services Inc., a financial software developer in Boston, to assist in risk management and portfolio optimization. "We've always had a strong focus on risk management, we're just installing some extra precautions," said David Brown, senior managing director at Victory.

In August, NYLIM hired Tony Elavia from Putnam Investments as chief investment officer for quantitative platforms. Mr. Elavia was asked to build a quantitative platform for all of NYLIM's asset management subsidiaries except Mackay Shields LLC, New York, which operates independently. In January, the firm also hired Ludger Hentschel, a professor of finance at the University of Rochester in New York, as a vice president of research to help develop multifactor models.

"We absolutely, positively do see managers moving toward quantitative strategies, such as enhanced index and structured products," said Greg Moore, director of manager research at investment consultant Segal Advisors Inc., New York. "We're seeing managers that most people think of as being traditionally active quietly moving to quantitative management."

Mr. Moore said client demand, as well as a desire to reduce business risk by money managers, is driving this trend. "Clients are demanding (quantitative management) to some extent. Consultants are demanding it. It's only natural because we're coming out of the years that the bubble popped, and a lot of people realized that they could not stomach the roller-coaster ride in terms of the performance of traditionally active managers. A lot of active managers have had very volatile alphas, and clients are asking if they have something with a little more risk control.

"The other point is that one of the big reasons all these investment managers are doing this is business risk. A lot of these folks saw their total assets under management swing wildly. It's sort of a marriage between what they want to offer and what clients and consultants want to see."