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JPMorgan's Fund Shop: Jack of All Trades, Master of Some

Insights into the big bank's big mutual fund business.

David Falkof, 01/08/2013

JPMorgan’s mutual fund business is what investors might expect of one of the country’s largest financial institutions. It has a large and diverse fund lineup, vast resources, a global investment team, and an assertive distribution effort. JPMorgan has built its fund business partly through acquisitions, but recent asset growth has come on the heels of 2008's financial crisis, when the parent bank showed its strength over competitors. The mutual fund operation stands out in some ways, but there are also deficiencies.

Funds for Every Investor
Similar to some other large fund companies, JPMorgan aims to meet the broad portfolio needs of every investor. JPMorgan's mutual fund business is housed alongside the firm's wealth-management and private-banking functions, which provide internal demand for a diverse set of funds. The firm's lineup of 112 funds covers all the major Morningstar Style Box categories and asset classes plus a handful of specialty strategies, including commodities, market-neutral, currencies, and Russian equities.

As an outcome of years of acquisitions by the parent company, the funds are run by a large number of management teams, partially resembling a multiboutique model. While some teams share resources, others function independently, giving rise to diverse investment philosophies and portfolio constructions. In several instances, JPMorgan offers funds with similar mandates but entirely separate management teams. The foreign large-blend category, for instance, includes four JPMorgan funds each run by a different team, and the U.S. large-blend category includes 10 distinct funds run by four separate management groups.

Providing a diverse and extensive fund lineup under a single roof has its advantages. JPMorgan's SmartRetirement target-date series, for instance, provides exposure to more than 20 JPMorgan funds, including multiple funds in the same category. The series, which was nominated for Morningstar's 2012 Allocation Fund Manager of the Year, owns two foreign large-blend funds, JPMorgan International Equity JSEAX and JPMorgan Intrepid International JFTAX. The former is driven by fundamental, bottom-up equity research, and the latter relies on quantitative models to pick stocks. The SmartRetirement portfolio managers believe owning complementary strategies in the same category can help stabilize returns through different market environments. So far they are doing something right: The SmartRetirement series of funds, home to more than $8 billion in assets, has earned 4- and 5-star Morningstar Ratings (which measure past risk-adjusted performance) and has received a Silver Morningstar Analyst Rating (which is a forward-looking assessment). The diversification benefits extend to other multiasset allocation funds run by the firm, such as the JPMorgan Investor funds.

From a business stability perspective, as well, the overlapping strategies make it more likely for any number of JPMorgan funds to be in favor during a particular market environment. Thus, the firm's management revenues are less dependent on a single fund or approach.

Room for Improvement
While the benefits are clear, producing consistently successful funds across multiple management teams and investment styles is extremely difficult. JPMorgan has yet to demonstrate it can achieve that goal. The firm has its fair share of stalwart management teams, such as the Columbus, Ohio, fixed-income team and the managers responsible for the target-date series. Similarly, Jonathan Simon and his team have produced excellent results at JPMorgan Mid Cap Value JAMCX. Unfortunately, JPMorgan Large Cap Value OLVAX has faltered under several managers in recent years.

Looked at as a whole, JPMorgan's fund performance is middling. The firm's five-year success ratio of 51% (the percentage of funds that beat the majority of their category peers and stay in existence over the previous five-year period through Nov. 30, 2012) roughly equals the industry norm. The firm's smaller 10-year success ratio of 29% means less than a third of the firm's funds have survived and outperformed their peers over the past decade. The firm's five- and 10-year numbers undoubtedly have been hurt by JPMorgan's history of merging and liquidating funds because of parent-company acquisitions or poor-performing strategies. Large firms may have a steeper challenge than boutiques when it comes to building consistently strong records, but it's not impossible: T. Rowe Price and Vanguard, both strong stewards of capital, have five-year success ratios of 81% and 78%, respectively.

Similarly, manager turnover at JPMorgan is a mixed bag. The firm's five-year manager-retention rate of 92% is on par with the industry median. For some funds in the lineup, the same manager has been at the helm for more than a decade, but in a handful of other cases, new management has taken over as managers have left or been pushed out. JPMorgan isn't an outlier in this regard but doesn't stand out as having a highly stable management team, as is the case at American Funds and Dodge & Cox.

David Falkof is a mutual fund analyst at Morningstar.
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