Insights into the big bank's big mutual fund business.
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.
The inconsistencies across the fund lineup make it more difficult for investors to pick the best funds. Picking the wrong fund can be disastrous, as became apparent in 2008's financial crisis. In the years leading up to the crisis, JPMorgan promoted JPMorgan Bond as a core fixed-income holding for its advisor and retail investor clients. The fund was run by JPMorgan's New York City bond team, and by mid-2007 it had gathered $2.4 billion in assets under management. Meanwhile, JPMorgan offered a separate fund with the same objective, JPMorgan Core Bond PGBOX, run by the firm's Columbus, Ohio, bond team. This fund was run primarily for institutional clients, such that in mid-2007, institutions represented 80% of the fund's $3.7 billion in assets. Unfortunately, retail investors chose poorly. In 2008, JPMorgan Bond lost 24% as the mortgage market implosion caught the managers off guard, while JPMorgan Core Bond gained 4%, benefiting from strong risk management and credit research. By mid-2009, heavy shareholder redemptions left JPMorgan Bond with just more than $100 million in assets, and before the year ended JPMorgan merged the fund into JPMorgan Core Plus Bond ONIAX, another fund run by the Columbus team. Following Core Bond's solid performance in 2008, the fund has seen strong inflows from both advisor and institutional channels, and now it houses $29 billion in total assets as of Nov. 30, 2012.
The performance inconsistencies among the fixed-income funds are a dramatic example, but similar concerns exist among the equity funds, too. In the large-value category, the firm offers two dividend-focused funds, JPMorgan Equity Income OIEIX and JPMorgan Growth & Income VGRIX, in which the former favors higher-quality companies relative to the latter. Both funds are run by the same manager, but over the trailing five-year period through Nov. 30, 2012, Equity Income has gained 3.1% annualized and is among the top performers in the category, while Growth & Income has returned 0.5% annualized. It is difficult to make a case for Growth & Income despite the subtle difference in strategy--and it is unlikely that investors are seeking such gradations among dividend-oriented funds. Offering both funds may simply create confusion.
JPMorgan has worked to simplify its lineup through fund mergers and liquidations. Since 2009, the firm has merged 16 funds and liquidated 14 more. In addition, on its website JPMorgan tries to help investors navigate its lineup by listing 40 of its highest-conviction funds. The existence of such a list, though, suggests the firm could further cull its roster of fund offerings.
That consolidation has been offset, however, by 17 new funds launched since 2009. The explanation for these new funds, as well as the continuance of such a broad lineup, goes back to the firm's goal to have something for everyone but also speaks to a desire to grow. JPMorgan scrutinizes its fund launches in a way similar to those of other large fund firms, but it has moved into recently popular areas of the fund industry, such as creating inflation-related strategies and a floating-rate bond fund.
Assets Rolling In
JPMorgan also has a powerful salesforce that has earned advisors' trust by providing commentaries on the market and macroeconomic environment, as well as access to fund managers. Further, the bank’s resilience in the financial crisis likely boosted advisors’ comfort level. In fact, since then, advisors have flocked to JPMorgan funds in droves. The firm has grown more than 3 times its size from the end of 2008 and now ranks as the seventh-largest U.S. fund company with more than $170 billion in total mutual fund assets (JPMorgan's asset management division has more than $1 trillion in assets under management). Initially most of the asset flows went into bond funds, but in the past two years the flows into several equity funds have been equally impressive.
Asset growth alone isn't necessarily a problem for investors, but rapid growth can impact a manager's ability to successfully run a strategy. When the firm launched the flexible bond fund JPMorgan Strategic Income Opportunities JSOAX in mid-2008 with a strong marketing push, the fund's assets ballooned to more than $10 billion within two years. JPMorgan had to stop actively marketing the fund to allow the manager to put the new cash to work.
More recently, steady flows into JPMorgan High Yield OHYAX have brought the fund's total assets up to $11 billion with another $24 billion in institutional accounts, making it one of the largest funds in the high-yield category. It remains to be seen if the fund can continue to execute its approach within the less frequently traded high-yield market.
Bank Ownership Has Its Pluses and Minuses
Partly driving the focus on asset growth at JPMorgan funds are the expectations of its parent company JPMorgan Chase, which has growth aspirations for the broad asset management division. In many respects, the JPMorgan fund business operates independently from the bank, similar to other bank-owned asset management companies. The fund business has its own administrative staff, including risk and compliance professionals, and information barriers between the bank and funds are strictly enforced. But the asset management division is tied to its parent company for better or for worse. On the positive side, the fund business can benefit from JPMorgan Chase's global presence and deep resources. Some of the stronger management teams have come together thanks to more than a dozen acquisitions and mergers of banks into the present-day company.
On the other hand, problems at the parent company unrelated to the asset management business can directly impact the reputation and stability of the fund business. For instance, in May 2012 a $6 billion trading loss at JPMorgan Chase's chief investment office exposed potential weaknesses of the parent company in its ability to monitor the risks of its many operations. According to JPMorgan, the losses didn't influence the resources available to its asset management division. Nevertheless, other bank-owned fund firms have faced setbacks when their parent company revenues dipped dramatically.
In addition, unlike with a pure asset management firm, investors in JPMorgan funds must cope with the uncertain impact of greater regulatory and media scrutiny on multinational banks. That was apparent in July 2012 when The New York Times accused the bank's Chase branches of inappropriately selling JPMorgan funds. While JPMorgan has refuted those claims, the article provided a clear depiction of the conflicts of interest inherent in brokerage and asset management firms having the same parent company. These challenges aren't unique to JPMorgan, but investors should be aware of them nonetheless.
The vast resources and management diversity available through JPMorgan's fund lineup is impressive. For many of its funds, those advantages have led to great results for fund shareholders. In other respects, though, the fund shop is still sorting through the weaker points in its lineup and management teams. Moreover, the firm's focus on growth has become more apparent in recent years, which is not a characteristic shared by the fund industry’s top stewards of capital. JPMorgan’s fund business has a blend of positive attributes and notable concerns. Investors, therefore, need to scrutinize a JPMorgan fund before jumping in.