JPMorgan Funds Grow With Advisors' Confidence

Morningstar recently issued a new Stewardship Grade for JPMorgan. The firm's overall grade--which considers corporate culture, fund board quality, fund manager incentives, fees, and regulatory history--is a C. What follows is Morningstar's analysis of the firm's corporate culture, for which JPMorgan receives a C. This text, as well as analytical text on the other four Stewardship Grade criteria, is available to subscribers of Morningstar's software for advisors and institutions: Morningstar Advisor Workstation(SM), Morningstar Office(SM), and Morningstar Direct(SM).

JPMorgan Asset Management's extensive mutual fund business is still a work in progress. Forged from a series of acquisitions made by parent company JPMorgan Chase, this diverse lineup continues to be refined and expanded. Meanwhile, a number of sound options are drawing advisors and plan sponsors. With almost $19 billion in inflows for the year through November 2013, it trailed only Vanguard and DFA--and raked in more than any other firm primarily associated with active management. It now ranks as the seventh-largest U.S. fund company, with more than $217 billion in total mutual fund assets.

The firm's assertive distribution effort is backed by an emphasis on education represented by the well-regarded quarterly Guide to the Markets, a book of charts illustrating market-trend data. Economist Dr. David Kelly is the face of this program, and his name may be better known to many advisors than those of the firm's fund managers. Kelly doesn't tout individual funds, and his regular "market insights calls" draw around 40,000 participants. (Meanwhile, JPMorgan wholesalers have been restyled as "client advisors.")

These outreach efforts are backed by an array of JPMorgan funds available to fit almost any slot an advisor might seek to fill. The mutual fund business is housed alongside the firm's wealth-management and private banking functions, which provide internal demand for a diverse set of strategies. The lineup of nearly 130 open-end mutual funds covers all the major Morningstar Style Box categories and asset classes and includes a sampling of specialty strategies such as market-neutral funds and those investing in commodities and currencies.

The funds boomed in the wake of the financial crisis, when parent company  JPMorgan Chase & Co (JPM) was lauded as a conservative bastion. The timely launch of former hedge fund manager Bill Eigen's  JPMorgan Strategic Income Opportunities (JSOSX) in 2008 drew a flood of assets, and the fund is now the firm's largest, with about $24 billion in assets.  JPMorgan Core Bond (WOBDX), which fared well in 2008 thanks to strong risk management and credit research, also proved popular, and it has $22 billion in assets. That fund, led by Doug Swanson, has earned a Silver Morningstar Analyst Rating (a forward-looking assessment indicating analyst confidence in a fund's prospects).

While bond funds initially drew the most attention, a number of the equity funds have seen significant inflows in recent years--even at times when other major fund companies were experiencing net outflows from stock funds. That trend is likely linked to the advisor education push, which has emphasized the appeal of equities at a time of compressed bond yields and imminent interest-rate rises. Bronze-rated  JPMorgan Large Cap Growth (SEEGX) more than tripled in size in 2012 (and has continued to see strong inflows in 2013), while inflows at Silver-rated  JPMorgan Mid Cap Value (FLMVX) led manager Jonathan Simon to close the fund in early 2013.

Ten of the 20 individual funds rated by Morningstar analysts are Morningstar Medalists, as is the SmartRetirement target-date series. The better funds have tended to draw the most assets, warranting analyst coverage by Morningstar (although JPMorgan Strategic Income Opportunities is rated Neutral). The lineup as a whole, however, is more middling than this cluster of Medalists might suggest. The firm's average Morningstar Rating, a measure of past risk-adjusted performance, was 3.1 out of 5 at the end of November.

The firm's five-year success ratio through November 2013 is 48%, meaning that just under half of JPMorgan funds both survived and beat the majority of their category peers over the past five years. That's in line with the fund industry average, but the firm's 10-year success ratio is only 37%. The largest firms tend to fare worse on this measure than smaller boutiques, but T. Rowe Price has a five-year success ratio approaching 80%, while Vanguard and American Funds are around 60%.

JPMorgan's figures are partly the result of an entrepreneurial practice of introducing new offerings in anticipation of advisor demand, coupled with a clear-eyed willingness to cut those funds that don't take off. JPMorgan Russia, for example, was recently liquidated because it didn't draw a significant asset base; after it was launched in 2007, exchange-traded funds rose to dominate the landscape for single-country funds. However, the firm's success ratios are also an outcrop of past acquisitions by JPMorgan Chase, which has resulted in a number of funds being liquidated or merged.

Gone are some weak links in the fixed-income lineup, notably JPMorgan Bond, run by the firm's New York-based bond team. It had been a popular core fixed-income choice for advisor and retail investor clients, but the implosion of the mortgage market caught its managers off guard. The fund had steep losses in 2008 and the following year was merged into another fund run by members of the Columbus, Ohio, fixed-income team, which is headed by JPMorgan Core Bond's Doug Swanson.

The Columbus fixed-income group landed at JPMorgan after the Bank One merger in 2004. To its credit, JPMorgan left the strong Columbus team intact, while bolstering its New York fixed-income team with an infusion of talent from Schroder Investment Management. Steve Lear now leads the macro-driven fixed-income strategy in New York, while Swanson's team continues its successful bottom-up approach. Both are now under Robert Michele, global fixed-income chief investment officer, but the research teams will remain distinct to protect the complementary approaches.

The equity platform encompasses three broad types of approaches under Paul Quinsee, CIO of core and value strategies, and Christopher Jones, CIO of growth and small-cap strategies. There are funds supported by JPMorgan's core analysts, who rank stocks using the firm's proprietary dividend discount model. (The largest of these is the Bronze-rated  JPMorgan U.S. Equity (JMUEX), which is notable for its consistently competitive risk-adjusted performance.) Funds with the Intrepid name follow quantitative strategies guided by behavioral finance. Then there are manager-driven funds employing distinct strategies with specialized research staff, including JPMorgan Mid Cap Value and JPMorgan Large Cap Growth. This diversity partly explains why JPMorgan has more than one fund in some categories.

The fund family as a whole still has some redundancies, though. George Gatch, CEO of the global funds management business, is currently focused on optimizing the product lineup. The family's large-cap core lineup will likely be pared back, as there are currently 13 funds in the large-cap blend category alone. Some of these funds likely would not be introduced by the firm today, such as the $2 billion JPMorgan Equity Index (HLEIX) (acquired along with Bank One). Others are similar to siblings but have hung on for logistical reasons. For example, JPMorgan Growth & Income (VGRIX) is a likely candidate for merger into the larger  JPMorgan Equity Income (HLIEX), run by the same manager, but until recently shareholders of the former would have lost the advantage of an accumulated tax-loss carryforward in the event of a merger.

​While some individual funds are not compelling, the varied lineup supports the firm's strong SmartRetirement target-date series, home to more than $18 billion in assets. The series provides exposure to more than 20 JPMorgan funds, including multiple funds in the same category. For example, the series owns two foreign large-blend funds, JPMorgan International Equity (JNEMX) and JPMorgan Intrepid International . The former is driven by fundamental, bottom-up equity research, and the latter relies on quantitative models. The SmartRetirement portfolio managers believe owning complementary strategies in the same category can help stabilize returns through different market environments.

The firm is clearly committed to growing the fund business. While it has liquidated or merged nearly 40 funds since 2008, it has launched a few more than that since the beginning of that year. This unabashed push is not inevitably a sign of shareholder unfriendliness. To be sure, some of these offerings may smack of "flavor of the moment," such as the recently launched JPMorgan Short Duration High Yield (JSDHX). But JPMorgan has the resources to tackle a variety of strategies, and prospective launches go through an extensive review process. It has moved deliberately when incubating alternative strategies, a space where funds are sometimes rushed to market to catch trends. (JPMorgan Asset Management expanded its presence in the alternatives space when it acquired Highbridge Capital Management, but it recently brought one disappointing Highbridge fund in-house and plans to liquidate the other.)

Asset growth in existing funds isn't inevitably a problem, but rapid growth can hamper a strategy. Management does take capacity into account and has closed funds to new shareholders, including several small-cap funds and JPMorgan Mid Cap Value. A micro-cap fund was liquidated in 2008, and there are no plans to introduce other offerings in this space, an acknowledgement that a strategy with a capacity of $500 million is better left to boutiques.  

That said, JPMorgan Strategic Income Opportunities has been flooded with cash at times, and JPMorgan simply slowed the spigot by easing up on marketing. Asset growth is a particular concern here because the fund is not built on the extensive research base supporting most of the rest of the family. Manager Eigen is able to call on expertise across the JPMorgan complex and does lean on the firm's Cincinnati-based high-yield team, but the core team isn't as broad and deep as some key competitors'. JPMorgan Asset Management CEO Mary Erdoes says that developing Eigen's resources is an ongoing focus for both her and Chris Willcox, global head of fixed income and liquidity. (Eigen is based in Boston and reports directly to Willcox, not up through Robert Michele.)

The firm's latest innovative ventures are supported by existing resources. The SmartRetirement Blend target-date series, launched in 2012, holds index fund ETFs, such as Vanguard S&P 500 and iShares MSCI EAFE, alongside JPMorgan actively managed funds. Next up are brand-name actively managed "smart beta" ETFs that will use proprietary factor models and build off the firm's fundamental research strengths. A recent SEC filing for the first one, Global Equity ETF, indicates that it will track a benchmark built by incorporating factors such as relative valuation, price momentum, and volatility.

There remains the challenge of assessing the impact of parent company JPMorgan Chase, which has lost its rock-solid reputation in recent years. In many respects, the fund business operates independently from the bank, similar to other bank-owned asset management companies. JPMorgan Asset Management has its own administrative staff, including risk and compliance professionals, and information barriers are strictly enforced. Erdoes has also pushed to shift some portfolio manager bonus compensation from company stock to money invested in the managers' own mutual funds--a nod to the importance of manager compensation in Morningstar's Stewardship Grades and Analyst Ratings.

There is still a concern that JPMorgan Chase might pressure the asset management business to grow, perhaps unsustainably, now that post-financial-crisis regulations limit other revenue sources. Then there is the intensified regulatory scrutiny on the bank and the question of whether the sins of the parent will affect the child. It is important to note that the asset management division was not implicated in the "London Whale" derivatives trading scandal or the misrepresentation of mortgage-backed securities that helped precipitate the meltdown. According to JPMorgan, the resulting billions of dollars in fines have not affected the resources available to the asset management business.

Other regulatory concerns hit closer to home. In recent years, the OCC has faulted the company for selling proprietary investment products in violation of ERISA, while media allegations that Chase brokers favored JPMorgan funds prompted SEC and FINRA investigations. These complaints do not involve the integrity of the mutual funds themselves. However, such headlines might mar public perception of the funds, spurring outflows that could adversely affect remaining shareholders. So far, asset flows suggest that advisors and plan sponsors remain confident.

Nor are there any signs that trouble at the top is sparking departures from the investment team. JPMorgan's one-year manager-retention rate of 96% is a bit above the industry average. The five-year manager-retention rate, at 93%, is on par with the norm. Turnover during that time is linked primarily to ongoing efforts to refine the fund lineup. Many of the most popular funds boast managers who have been at the helm for more than a decade, including Doug Swanson and Jonathan Simon. The firm's asset-weighted manager tenure is 10.5 years. Its core U.S. equity research team is also notable for the tenure of its more than 40 analysts, and it is headed by Helge Skibeli, a 23-year firm veteran.

Regulatory and headline risk aside, the fund business benefits from the company's global presence and deep resources. Investment professionals on the U.S. research team enhance their perspective working with colleagues in Europe and Asia. They also can count on having the resources they need even in lean times. Given the broad range of products, a number of JPMorgan funds are likely to be in favor during a particular market environment, reducing reliance on any one product.

JPMorgan's Corporate Culture grade of C reflects the fund business' evolving status. The shop is growing aggressively, while sorting through the weaker spots in its lineup. However, the firm is earning advisors' confidence and carving out a reputation as a reliable steward of capital.

This article is the Corporate Culture portion of the Morningstar Stewardship Grade for Funds for this fund family. Click here to see Morningstar's Stewardship Grade methodology.