An Upbeat View From JPMorgan's Private

Bank
Despite European jitters, new CE sa!s it's time "or investors
to #ome out "rom t$e bunker%
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!opin Tan
"a #$% &0#&
'o(n )*++% t(e new CEO o+ 'P"organ,s -./. Pri0ate Bank% is tring to (elp clients manage 1230 billion
o+ wealt( at a time in (istor w(en t(e are desperatel clinging to t(e com+ort and transparenc o+ cas(%
t(anks to t(eir still4tender scabs +rom t(e scandal4and4recession ears. )*++,s approac( is to arg*e% not
*nreasonabl% t(at t(e world is a better place toda t(an t(ree ears ago% w(en t(e wo*nds were +irst
in+licted.
5People,s attit*des abo*t in0esting (a0e not kept pace wit( t(e impro0ement% beca*se o+ t(is +l4w(eel o+
tro*bling news t(at,s in constant motion%5 )*++ tells Penta in (is +irst press inter0iew since becoming
CEO o+ t(e -./., largest pri0ate bank in 6*g*st o+ last ear. 5In0estors are still too com+ortable (olding
cas(.5
)*++,s pitc( probabl became more complicated a+ter 'P"organ prod*ced its own *n+ort*nate (eadline7 a
s*rprise 1& billion trading loss t(at (as alread claimed its c(ie+ in0estment o++icer. 8)*++ does not report
to t(e CIO,s o++ice9 no assets o+ pri0ate bank clients were in0ol0ed.: /till% w(en it comes to t(e big pict*re
seen +rom t(e 3#st +loor o0er Park 60en*e% t(e 2#4ear4old banker sees t(e moderate -./. reco0er
end*ring% o*r econom e;panding at a ro*g(l &< pace w(ile in+lation remains benign. Corporate
6merica,s pro+its are still growing% albeit at a slower pace% as t(e gl*t o+ a0ailable (omes slowl starts to
s(rink and t(e (o*sing market comes o*t o+ its tro*g(.
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'P"organ,s 'o(n )*++ is telling clients to normali=e port+olio risk. Brad Trent +or Barron,s
T(e e*ro =one% w(ic( )*++ +eels generates s(riller (eadlines t(an it s(o*ld% is going to m*ddle t(ro*g( its
+iscal crisis% e0en i+ its constit*ents ma look di++erent ears +rom now. "eanw(ile% (al+ t(e planet,s
growt( is propelled b economies 5de0eloping5 in name onl 44 >2< o+ emerging markets are now
deemed in0estment4grade. T(ese de0eloping co*ntries are in +act now e;tending credit to t(e more mat*re
economies o+ t(e globe.
)*++ comes to (is new ?ob wit( a +irm gro*nding in t(e in0estment side o+ pri0ate banking @e pre0io*sl
was 0ice c(airman and ran t(e pri0ate bank,s nort(east in0estment b*siness. @e also sat on t(e pri0ate
bank,s in0estment strateg and in0estment re0iew committees% as well as its e;ec*ti0e committee. @e
s*cceeds Cat(erine !eating as CEO and now o0ersees w(at is b +ar 6merica,s largest pri0ate bank in
assets. A(ile it ser0es in0estors wit( 12 million and *p% its (eritage and strong(old is t(e *ltraric(% wit(
most acco*nts e;ceeding 1&2 million.
6gainst )*++,s (ope+*l macro o*tlook% t(e s*ggestion t(at in0estors allocate 3#< o+ t(eir port+olio to
p*blic stocks ma seem conser0ati0e 8see table below +or 'P"organ,s balanced model port+olio:. B*t
)*++ B*ickl points o*t t(e model act*all carries a ro*g(l C0< e;pos*re to risk assets9 in t(is atpical
reco0er% in0estors mig(t be better o++ spreading t(eir risk commitments o0er man asset classes% like
opport*nistic pri0ate eB*it +*nds or (edge +*nds. )*++ also likes (ig(4ield bonds t(at pa abo0e core
go0ernment bonds b*t (a0e low corporate de+a*lts and rob*st compan earnings. -n+ort*natel% )*++
declines o*r reB*est to drill down on speci+ic picks 44 (e pre+ers to +l at 32%000 +eet.
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B*t (e did e;plain (ow in0estors can bene+it +rom 5ot(er people,s mistakes.5 Ait( E*ropean banks
repairing t(eir balance s(eets +orced to sell assets w(olesale% pri0ate4eB*it +irms are ideall positioned to
swoop in and pick *p c(oice carrion. For e;ample% commercial mortgage4backed sec*rities iss*ed totaled
?*st 130 billion last ear 44 a +raction o+ t(e pre4crisis 1&00 billion ann*al (a*l. 6s a res*lt% t(e ne;t +i0e or
si; ears will see (*ndreds o+ billions o+ real4estate debt coming d*e% and owners w(o can,t re+inance will
be +orced to liB*idate.
T(ere comes a time w(en pricing is dictated not ?*st b 0al*e% b*t b timing% )*++ sas% and 5t(ose w(o
(a0e capital w(en debt is d*e are going to be dictating price.5 Pri0ate4eB*it +*nds co*ld snag real estate
at below replacement cost% a power+*l incenti0e +or pri0ate bank clients to mo0e some cas( into pri0ate
eB*it be+ore t(e pla (as passed. /*re% pri0ate eB*it is more illiB*id t(an p*blic stocks% b*t )*++ sas
in0estors can e;pect 44 and s(o*ld target 44 ret*rns at least +i0e percentage points better t(an t(ose o++ered
b t(e /tandard D Poor,s 200.
'P"organ,s largest allocation a+ter stocks is a ro*g(l &&< sl*g to (edge +*nds. 5Ae get acti0e risk
management in t(at portion o+ t(e port+olio%5 (e sas% 5and it mitigates +or *s an dependence on toggling
back and +ort( between eB*ities and bonds% since no one (as great insig(t and consistent timing in getting
t(at s(i+t rig(t.5
@edge +*nds also o++er e;pos*re to targeted strategies. )*++ e;pects 5e0ent4dri0en5 (edge +*nds t(at bet
on mergers% spino++s% b*backs% or ot(er special sit*ations to t(ri0e 44 gi0en t(e record 1#.& trillion o+ cas(
in non+inancial corporate co++ers and t(e mo*nting press*re b acti0ist in0estors to ret*rn some o+ t(at
l*cre to s(are(olders. 5Ae don,t know w(ic( companies are going to c(oose w(ic( a0en*e to ret*rn 0al*e
to s(are(olders%5 (e sas. 5B*t (a0ing an e0ent4dri0en manager w(o is +oc*sed on t(ese catalsts s(o*ld
bene+it o*r clients.5
)*++ grew *p in Park /lope% Brookln% be+ore it was stlis( to do so. @e ?oined 'P"organ in #$>& and
worked in corporate and in0estment banking be+ore (e ?oined t(e pri0ate bank. Toda% t(e pri0ate bank (as
some &%>>0 ad0isers globall managing 1>30 billion in client assets 44 incl*ding 1230 billion in t(e -./.
)*++,s teet(4p*lling task wit( t(e bank,s -./. clients isn,t *ne;pected in t(e a+termat( o+ t(e +inancial
crisis. 5Eo one likes to lose mone% and people,s attit*des abo*t t(at toda are still (eig(tened% t(ree ears
later%5 (e sas. 5B*t t(ere comes a point w(en t(at attit*de starts to cost in0estors.5 T(e problems7
6rti+iciall low interest rates t(at can,t keep pace wit( in+lation will B*ietl and insidio*sl erode clients,
standards o+ li0ing.
On anot(er +ront% 'P"organ is *rging in0estors to (*ddle wit( t(eir bank o0er t(e B*s(4era ta; c*ts% w(ic(
are likel to e;pire at t(e end o+ t(e ear. T(at incl*des t(e li+etime gi+t4ta; e;emption o+ *p to 12.#
million per person 8or 1#0.& million per co*ple: w(en propert is gi+ted and trans+erred. It,s a matter o+
time be+ore ta;es +or e0ert(ing +rom income to capital gains will rise dramaticall +rom toda,s low
t(res(olds. 5I+ o* own large liB*id or illiB*id positions% t(is is t(e ear to ask o*rsel+ i+ o* want to
manage some o+ t(at ta;4rate risk b liB*idating some o+ t(ose (oldings5 and paing t(e relati0el low ta;
now.
)*++ sas in0estors s(o*ld consider *sing credit lines to ad0ance speci+ic b*siness goals% w(et(er
e;panding a small entreprene*rial b*siness% or scooping *p distressed assets in an area o+ e;pertise. 5It,s
critical to t(ink ?*st like a good corporate treas*rer% and t(e bea*t o+ borrowing rig(t now is o* can lock
in low rates%5 w(ile managing an potential rate (ikes t(ro*g( swaps.
@is o0erseas plas were not partic*larl *n*s*al. T(e growing middle class in C(ina% India% and Bra=il
represent opport*nit% since cons*mption in emerging markets is accelerating and acco*nts +or 3C< o+ t(e
globe,s total% w(ile t(e -./.,s (as slid to &C< +rom 3C< o0er t(e past two decades. T(is bodes well +or
5t(ings t(at represent t(e con0enience o+ li+e%5 +rom a*tos to electrical appliances like was(ers and drers%
sto0es% re+rigerators% and air4conditioning.
@e,s b*llis( on energ in+rastr*ct*re +or bot( -./. and +oreign co*ntries. P*ndits are pro?ecting some 133
trillion in energ spending o0er t(e ne;t #2 ears. Betting on commodities like oil can pro0e 0olatile% o+
co*rse% b*t companies +acilitating transmission or b*ilding pipelines s(o*ld bene+it +rom growing power
cons*mption. @e s*ggests sco*ring +or companies or geograp(ies t(at will bene+it +rom prod*cti0it
dri0es in t(e energ sector. 5Better tec(nolog is going to allow bot( pro0en energ reser0es to be mined
more e++icientl% as well as t(e e;ploration o+ pre0io*sl *ne;plorable reser0es%5 (e sas.
Real estateF Cali+ornia and Florida mig(t (a0e t(e rig(t address. 5Commercial real estate will contin*e to
be a good in0estment in bot( economies%5 (e sas. 6not(er wa0e o+ inno0ation is coming o*t o+ /ilicon
Galle% w(ile 0acant residential towers in downtown "iami (as attracted E*ropean and Latin 6merican
in0estors taking ad0antage o+ o*r weak dollar. Eo s*rprise% t(e pri0ate bank% seeing new mone coming in%
(as e;panded into bot( states o0er t(e past t(ree ears.
6s we are abo*t to lea0e t(e lig(t4+illed con+erence room% )*++ reiterates (is core point% making s*re we
got it. 5Eow,s t(e time to normali=e t(e risk in port+olios in order to lea0e be(ind w(at we t(ink is
becoming t(e s*bstantial cost o+ owning cas(.5

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