JPMorgan Income A JGIAX

JPMorgan Income’s experienced manager trio, established approach, and focus on consistent income makes this a compelling multisector bond offering.

The strategy features a very capable lead manager. Andrew Norelli has anchored this fund since its mid-2014 inception and continues to evolve with the additions of Drew Headley and Thomas Hauser, securitized and high-yield specialists, respectively. The fund draws on JPMorgan’s Global Fixed Income, Currency, & Commodities platform, which includes a small army of sector specialists, research analysts, traders, and risk managers. These common resources across the firm’s fixed-income strategies highlight the depth, experience, and collaboration required to effectively manage this wide-ranging mandate. The comanagers’ broad fixed-income knowledge is key to understanding relative value, but their specialty expertise gives this team an edge.

That relative value approach underscores a solid process. Like other firm managers, this team draws on the broader group for its macro outlook to guide broad positioning. Their daily interactions inform sector and security selection and focus on investments that will deliver high, consistent income. Yet its benchmark-agnostic mandate allows them wide discretion to implement the managers’ best ideas. Despite this flexibility, the fund aims to keep volatility between 4% and 6%, as measured by standard deviation.

The flexibility focuses on high-yield corporates and securitized debt that constitute the majority of the fund’s assets. Better relative valuations and risk-adjusted return prospects have led to higher securitized bond stakes in recent years, which made up nearly 70% of assets (as of September 2023), up from about 65% a year ago. However, the team effectively diversifies these holdings that include agency mortgage-backed securities, nonagency MBS, commercial MBS, and asset-backed securities. A cautious economic outlook since 2022 has resulted in reduced credit risk. For example, the fund’s agency MBS stakes doubled to 20.2% of assets (as of September 2023) from a year ago while its 22% high-yield corporate allocation fell by about 6 percentage points.

The fund has delivered solid long-term absolute and risk-adjusted results. Since its July 2014 inception, the R6 shares’ 3.0% annualized return through November 2023 beat its average multisector bond peer’s 2.4% and was better than 78% of rivals. The fund’s normal yield advantage versus peers helped drive performance, but the strategy’s elastic positioning can lead to varied outcomes over shorter periods when riskier assets are out of favor.

The strategy’s flexible, benchmark-agnostic mandate gives the team wide discretion to implement the team’s best ideas from global macroeconomic and sector specialists across the firm. The challenge here is to synthesize the various inputs to construct a diversified portfolio within a volatility range of 4%-6%, as measured by standard deviation. The strategy’s parameters are broad, with a duration band of less than 10 years (typically between 2 and 6 years), a maximum of 65% in below-investment-grade debt, and a 10% maximum in non-U.S.-dollar-denominated securities.

JPMorgan’s quarterly macro view guides broad portfolio positioning, and the daily collaboration among the comanagers, sector specialists, researchers, and traders informs most decisions. Norelli and team strive to achieve diversification within these higher-income areas, led by high-yield corporates and securitized debt, which make up a majority of the fund’s assets. This securitized stake has more than doubled to nearly 70% since the fund’s early days, but thoughtful diversification within this area includes agency MBS, nonagency MBS, CMBS, and ABS.

The fund’s income-banking mechanism estimates distributions throughout a calendar year and smooths those to deliver predictable monthly income to investors; it will pay any excess income at year-end.

The fund’s higher income generation leans heavily on securitized sectors that the team argues offer good relative value and compelling risk-adjusted return prospects. While high-yield corporates and securitized debt make up the bulk of the portfolio, the asset mix has evolved and, more recently, reflects the team’s cautious economic outlook.

The comanagers favor self-amortization and strong fundamentals of securitized bonds, which now make up more than 70% of assets (as of September 2023), 5 percentage points more than a year prior. This asset mix within securitized has also changed over this period. Attractive valuations led the team to double its agency MBS stake to 20.2% of assets from a year ago and slightly increase nonagency MBS to 11.9%. At the same time, allocations to ABS (14.8%) and CMBS (23.5%) fell slightly; while CMBS is the largest exposure in the fund, it has limited its exposure to office buildings in favor of residential properties tied to strong rental income. High-yield normally accounts for 20%-40% of assets, and the fund’s 22% in junk-rated corporates fell by about 6 percentage points over the previous year, and even more since the fund’s 30% stake leading up to the Russia-Ukraine conflict in early 2022.

The team uses interest-rate positioning to manage overall risk. When the strategy’s exposure to lower-credit-quality bonds rises, duration (a measure of interest-rate risk) generally lengthens. For example, when credit risk rose at the beginning of 2022, the fund’s duration lengthened by about 3.0 years to 4.5 years by the end of 2022.

Norelli has anchored this strategy since the fund’s mid-2014 inception and brings more than two decades of multisector bond expertise. Comanagers Headley and Hauser joined in 2017 and 2020, respectively, and each brings about 30 years of industry experience into the fold. Collaboration and knowledge across all fixed-income sectors are key here, but their respective specialty expertise gives this team an edge. Headley is head of securitized strategies at the firm and manages the securitized sleeve of the portfolio, while Hauser is a high-yield specialist and manages the non-investment-grade corporate sleeve. However, Norelli’s broader market expertise and since-inception tenure introduces moderate key-manager risk here.

The comanagers work closely to make investment decisions. This team approach requires each manager to be well-versed in multiple areas of the bond market and draws on the firm’s sizable and capable supporting resources, which include 21 investment-grade, 23 high-yield, and seven securitized credit analysts. The firm promoted the former head of global credit research, Kay Herr, to U.S. fixed income CIO effective October 2023, and appointed two-decade research veteran Samrawit Soquar to replace her in that role.

Alignment of interests with investors is strong, too. Norelli and Headley each invest more than $1 million in the strategy, while Hauser has between $100,001 and $500,000.

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.

This top-quartile result rivals its peer rank when adjusting for risk. The fund’s Sharpe ratio, a measure of excess return relative to its standard deviation, was better than three nfourths of peers.

The fund typically enjoys a yield advantage versus peers, normally near the category’s upper quintile, yet the team’s cautious outlook has tempered risk-taking over the past year. The fund’s higher-than-peers income because of its high-yield and securitized credit stakes has been the largest long-term contributor. However, the strategy’s elastic positioning has led to varied outcomes over shorter periods when riskier assets fell out of favor. Most notably, the fund’s 16% CMBS stake coming into 2020 contributed to its 12.6% drop that year, 3.2 percentage points more severe than its typical peer and worse than 80% of rivals. However, the strategy’s longer duration and general derisking, including small shorts to Russia, helped it soften the drawdown in 2022’s first quarter with a 2.6% loss, less severe than the 4.3% drop of its typical rival.

The fund's longer duration profile since the beginning of 2022 has weighed on performance as long-term yields continued to rise. For the year to date through November 2023, the strategy’s 4.4% gain trailed the average multisector category peer’s 5.4% result, landing near the bottom third of rivals.

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 Medalist Rating of Bronze.