JPMorgan Global Bond Opportunities R6 GBONX

JPMorgan’s Global Bond Opportunities strategy benefits from an experienced management team, the firm’s wider resources, and a flexible and nimble investment process.

The Morningstar Analyst Ratings for the respective clean share classes of the Luxembourg- and UK-domiciled versions remain unchanged at Bronze, while other share classes range between Silver and Neutral, depending on fees. For the US-domiciled fund, the cheapest R6 share class remains unchanged at Silver. Other share classes are rated between Bronze and Neutral, depending on fees.

Global fixed-income CIO Bob Michele and international fixed-income CIO Iain Stealey comanage the strategy, backed by a well-resourced and experienced team. In light of their contributions to idea-generation and returns, four comanagers were added to the strategy in July 2020: Lisa Coleman, head of global investment-grade corporate credit, who joined in 2008; Andrew Headley, head of securitized strategies, who joined in 2005; Jeff Hutz, a high-yield portfolio manager who joined in 2004; and Diana Amoa, an emerging-markets portfolio manager who joined the team in 2015 but left in April 2021.

The strategy aims to maximize total return with a 5%-10% volatility target, which allows the team considerable flexibility in investing in a variety of sectors, such as high-yield and investment-grade corporates, emerging markets, and securitized debt. Macro decisions are the dominant driver of the process. The comanagers and sector team heads debate the macro environment at quarterly meetings, which define the team’s top-down investment road map. During the weekly sector team meetings, fundamental, quantitative, and technical research inputs are generated for every sector, which help fine-tune the asset allocation.

For most of the time since inception, the large stake in high-yield debt has ranged between 35% and 65%, across corporate credit, emerging-markets exposure (government bonds and corporates), and securitized and has been beneficial in a generally benign market environment. This flexibility has seen the team exercise sound judgment in reducing that stake when valuations are less compelling and make use of the wider tools available. This gives confidence in the team’s ability to proactively reduce risk and modify exposure levels in market stress periods.

The strategy first became available to US retail investors in 2012 and then as a SICAV in 2013. Since their respective inception dates all three vehicles (Luxembourg, UK, US) outperformed their respective peers and category indexes on an absolute and risk-adjusted basis. In 2022 the strategy couldn’t escape posting a negative return, but the outcome was better compared with peers and handsomely ahead of the respective indexes for the different vehicles. Credit exposures including corporate investment-grade and high yield, as well as emerging-markets debt detracted as spreads widened. However, net short government bond duration throughout the year, mainly via US Treasuries but also European government bonds, was the main driver of outperformance. A hedging position in Russian CDS also helped at the beginning of 2022.

We therefore rate the Process Pillar at Above Average.

The strategy is managed dynamically and has a global investment universe, including a wide range of fixed-income sectors, such as developed- and emerging-markets sovereign and corporate bonds, securitized debt, and currencies.

Macro decisions are the dominant driver of the process. The comanagers and sector team heads debate the macro environment at quarterly meetings, which define the team’s top-down investment road map. During the weekly sector team meetings, fundamental, quantitative, and technical research inputs are generated for every sector and are used in the weekly portfolio strategy meeting to fine-tune the asset allocation. This is driven by each sector’s expected return and conviction level. Sector teams play a vital role in credit selection.

The strategy’s broad guidelines include a 75% limit to high-yield exposure, a sector in which the strategy has exhibited a heavy bias historically, albeit more tempered of late. Duration can range between negative two to positive eight years, but in practice it has never been negative.

As of March 2023, the strategy had a duration of 4.1 years, an increase from 2.1 years one year prior. The increase in duration mainly came from the reduction of short duration in government bonds since second-quarter 2022 onwards. The bulk of duration today comes from exposure to credit (2.9 years) and emerging markets (1.2 years), with 0.2 years coming from securitized. There is a negative duration of 0.1 years in government bonds (it was negative 2.8 years one year ago) as it holds short exposure to Japanese government bonds, and a small short exposure to German Bunds as a hedge for duration risk in credit and emerging markets. The strategy also holds 0.2 years long exposure to US Treasuries.

From an asset-allocation perspective, corporate credit accounts for 52.6% (lower from 57.6% a year ago), including 6.3% in non-US high-yield and 4.4% in US high-yield. Allocation to high-yield was reduced by about 10% compared with a year ago by adding CDX protection and reducing US exposure in anticipation of a recessionary environment. Within high yield there is a preference toward defensive sectors such as telecoms and cable. The managers continued to favor investment-grade corporate credit with a roughly 38% allocation (up from 26% a year ago), focusing on quality firms in defensive sectors and senior financials. The credit allocation also includes 4.3% in convertible bonds, most of which are US companies.

Exposure to emerging-markets debt stood at 16% (from around 17% a year prior) and included a 7.7% stake in local-currency debt, 5.1% stake in hard-currency sovereigns, and 3.2% in corporate bonds. Securitized debt accounted for 5.1%—a small reduction from 6.4% a year ago—and consisted of diversified exposure in mortgage-backed securities, asset-backed securities, and collateralized loan obligations.

The departure of Nicholas Gartside(previously international fixed-income CIO and comanager here) in 2019 didn’t cause disruption, as the presence of Michele and Stealey, both comanagers since inception, ensures continuity.

The managers primarily focus on top-down positioning; Michele focuses on US macro, while Stealey is more focused on the non-US side, mainly Europe. They rely on the expertise of sector specialist teams for idea generation and security selection across currency, rates, credit, securitized, and emerging-markets debt. Four comanagers were added to the strategy in July 2020 in recognition of their contributions to idea generation and returns: Lisa Coleman, head of global investment-grade corporate credit, who joined in 2008; Andrew Headley, head of securitized strategies, who joined in 2005; Jeff Hutz, a high-yield portfolio manager who joined in 2004; and Diana Amoa, an emerging-markets portfolio manager who joined the team in 2015. Amoa left in April 2021, but her departure did not cause any disruption given the team-based approach. Our conviction here is driven by the experience and portfolio management skills of the lead managers, the tenures of the comanagers, as well as the depth and quality of the available sector team resources. We therefore maintain the People Pillar rating at Above Average.

As of 2022, this investment stalwart manages more than USD 2.5 trillion in AUM. Composed of various global cohorts and diverse asset classes, the firm has more tightly integrated its capabilities in recent years, notably through the development of proprietary analytical and risk systems. Investment teams are robustly staffed and helmed by seasoned contributors. The firm’s strategies tend to produce reliable portfolios, and several flagship offerings are Morningstar Medalists. Manager incentives align with fundholders'; compensation reflects longer-term performance factors, and portfolio managers invest in the firm’s strategies as part of their compensation plans.

The firm’s funds tend to be well-priced, but they aren’t as competitive as many highly regarded peers of similar scale. Recent product launches include thematic and single-country strategies, both of which carry the potential for volatile performance and flows, along with misuse by investors. The firm remains intrepid when it comes to developing an environmental, social, and governance-focused framework and continues to move into other areas such as direct indexing through its 55iP acquisition and China through its joint venture, but these complicated initiatives take time to assess any real and lasting effect.

Although asset-allocation moves can be difficult to time, the team here has added value with its calls since inception. A large allocation to high yield has helped this fund thrive in previous credit market rallies, such as in 2013, 2016, 2017, and 2019. The decision to increase exposure in credit and emerging markets also helped during the market-recovery phase from second- to fourth-quarter 2020, while the decision to increase high-yield allocation helped in 2021. At the same time, the strategy has held up relatively well during credit downturns owing to the team’s decision to reduce risk. For example, the decision to have an underweight positioning in the energy sector in mid-2015 to early 2016 prevented the fund from getting hurt more than its average peer. In addition to that, the team has made some deft tactical moves to respond to quickly escalating risks. An example here includes the first-quarter 2020 selloff caused by the outbreak of the coronavirus pandemic when government rates exposure in the US, Canada, and Australia; a reduction in high-yield positioning; shorts in emerging-markets currencies; and longs in safe-haven currencies helped the fund hold up better than most peers. 2022 was another good example of a volatile period during which the strategy managed to contain downside volatility. While it couldn’t escape posting a negative return, the outcome was better than against peers and handsomely ahead of the respective indexes for each vehicle of the strategy. Credit exposures including corporate investment grade and high yield, as well as emerging markets debt, detracted as spreads widened. However, net short government bond duration throughout the year, mainly via US Treasuries but also European government bonds was the main driver of outperformance. A hedging position in Russian CDS also helped at the beginning of 2022. Year-to-date as of end March 2023 the strategy performed in line with peers. Credit exposure across investment grade, high yield, and emerging markets contributed, while its net short government bond duration slightly detracted.

Based on our assessment of the fund’s People, Process, and Parent pillars in the context of these expenses, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Silver.