Is JPMorgan Fabricating Its Mutual Fund Returns?

If you’re not thinking about investing in a mutual fund from JPMorgan Asset Management, you probably should be. Just have a look at the following statistics which are taken straight from the horse’s (or should we say “whale’s”) mouth. 

84% of JPM’s 10-year long-term mutual fund AUM is ranked in the top two quartiles, while 70% and 81% of JPM US equity mutual funds have outperformed their benchmark on a 1- and 3-year timeframe, respectively, and then, to top it off, 83%, 85%, 86%, and 100%(!) of AUM has outperformed both the peer median and benchmark in equities, fixed income, multi-asset solutions, and alts, respectively. 

Here are the pretty slides:

 

 

 

 

Impressive numbers. We think. In last year’s presentation, the bank cited Morningstar and Lipper (who know a thing or two about calculating mutual fund returns) as sources. The only (admittedly small) problem is that it later turned out that Morningstar and Lipper had no idea how JPM calculated the returns.

Here’s Bloomberg

A year ago, a list of achievements in JPMorgan’s investor presentation included the statement: “80 percent of 10-year mutual fund AUM [assets under management] in top 2 quartiles.” Asked about such numbers in November, JPMorgan declined to provide details of the calculations for publication. So Bloomberg asked two fund research companies the bank cited as sources—Lipper and Morningstar—to come up with their own estimates. (All calculations exclude money-market mutual funds.) Lipper, using its standard methods, calculated that 64 percent of the bank’s funds ranked in the top half of their categories, after adjusting for assets—giving greater weight to bigger funds. Morningstar, which didn’t adjust for assets, came up with 58 percent.

 

Many of the numbers for JPMorgan’s “alternatives/absolute return” category, which includes hedge funds, funds of hedge funds, some mutual funds, and money managed in separate accounts, are not public. According to the bank’s 2014 presentation, 97 percent of alternative assets beat their benchmarks for the previous 10 years. In 2015 that figure rose to 100 percent. Working from their own, more limited data on JPMorgan’s alternative assets, Morningstar and Lipper got different numbers. Morningstar said 33 percent of JPMorgan’s alternative assets beat their benchmarks over the previous 10 years. Lipper’s figures show that only 14 percent did.

When you actually try to decipher some of the rather convoluted language the bank uses to describe its returns, you start to get an idea of why it might not be a good idea to rely on the data in the investor day presentations. 

Take the 84% figure for instance. It seems to us that what the bank is saying is that 84% of the AUM in JPM funds that have been around for at least 10 years saw returns in the top two quartiles. That seems like a woefully simplistic way of calculating performance as they’ve basically just taken a grand total of assets accumulated in funds that have been around for a while and then looked at what percentage of those assets fall into the top brackets based on performance over the past decade. But don’t take our word for it, just ask JPM: 

JPMorgan provided Bloomberg with what it called an illustration of how it reached the 80 percent number. Using Morningstar Direct, a Web-based tool, it looked at all the funds with 10-year records. It checked each one’s ranking within its category for the 10-year period and its assets in the final month of the period, and concluded that 79.8 percent of the assets were in funds that ranked in the top two quartiles of their categories.

Ok, so let’s say you wanted to do it right, how would one go about that? 

Morningstar’s method differs from JPMorgan’s. To reflect each fund’s ups and downs, the company typically calculates its rank within its category for every month to come up with an average ranking for the period, and does the same with assets. In effect, it uses a video of the fund, not a snapshot. That way, a fund that had a couple of hot years early in the 10-year period, attracted more cash from investors, and then saw its performance level off doesn’t get too much credit for those first strong years, when it was investing a relatively small amount of money.

 

Using its standard methods for calculating asset-weighted returns, Morningstar finds that JPMorgan’s funds outperformed 57.5 percent of similar funds on average.

Of course, all of this is backward looking, so perhaps JPM calculated the numbers in this year’s presentation differently, but we certainly doubt it given that they all look remarkably similar to the figures in last year’s slides. For those who are interested, JPM does have some extensive notes you can read on its scrupulous (and needlessly torturous) methodologies. Here’s an excerpt which explains the 84% figure mentioned above:

 

At the end of the day all of this likely misses the point. We are talking about presentations made to shareholders after all, so fund performance doesn’t really matter. What does matter is summarized nicely in the final slide of this year’s presentation, shown below.