J.P. Morgan Asset Management: A Reliable Steward

Morningstar recently issued a new Stewardship Grade for J.P. Morgan Asset Management. The firm's overall grade--which considers corporate culture, fund board quality, fund manager incentives, fees, and regulatory history--is a B. What follows is Morningstar's analysis of the firm's corporate culture, for which J.P. Morgan Asset Management also receives a B. 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).

With continued healthy inflows in 2015 and more than $250 billion in mutual fund assets at the end of the year, J.P. Morgan Asset Management held its place as the seventh-largest U.S. mutual fund company. It is also among the world's largest asset managers, with nearly $2 trillion in assets. Forged from a series of acquisitions made by parent company

The asset management arm operates independently from the parent bank, similar to other bank-owned asset managers. It has its own administrative staff, including risk and compliance professionals, and information barriers are strictly enforced. CEO Mary Callahan Erdoes reports directly to the corporate board. Erdoes and J.P. Morgan Asset Management chairman Paul Bateman have prioritized a strong investment management team. Until recently, Erdoes directly oversaw the investment management portion of the firm in addition to the private bank. In May 2014, Chris Willcox, formerly head of global fixed income, was named CEO of global investment management, reporting to Erdoes. The change may be part of longer-term succession planning (Erdoes has been reputed to be a possible successor to JPMorgan Chase chairman and CEO Jamie Dimon), but carving out Willcox's role made sense given the size and complexity of the investment management side of the business. During his tenure as head of fixed income, Willcox facilitated collaboration among teams originating from different shops and based in 11 cities around the globe, while enabling them to focus on their established strategies, and he has not disrupted successful practices already established in other areas of the investment team overall. Bob Michele, CIO of global fixed income, currency, and commodities, took over as head of the group in mid-2014, ensuring continuity there.

Willcox has emphasized the importance of retaining investment talent by offering competitive pay and research resources. He is also prioritizing succession planning, an issue that came to the forefront in 2015 when Doug Swanson, longtime manager of the firm's largest fund,

That said, high-level departures on the investment team have been rare, which is a testament to the priority on retention established by Erdoes and Bateman. The July 2014 loss of Chris Jones, who was head of U.S. growth and small-cap equity strategies, came as a surprise. (Jones is now co-head of global equities at BlackRock.) His departure did not cause any obvious disruptions, however, and did not spark an exodus. While Jones was listed as a manager in the prospectuses of funds he oversaw, he did not have day-to-day managerial duties. Jones had shared responsibilities with Paul Quinsee, who oversaw the U.S. core and value strategies. Quinsee is now sole head of U.S. equities, and the structure of and interaction among the various teams was not affected.

The long-tenured investment teams and distinctive analyst culture remain strengths. J.P. Morgan's five-year manager-retention rate remains a solid 95% despite the departures of Jones and Swanson. The most popular funds generally boast managers who have been at the helm for a decade or more--including Simon, Luddy and his comanager Susan Bao, and Giri Devulapally of

Acknowledging the tenures in his group, Quinsee decided in 2104 to add 10-year performance to U.S. equity manager assessments where applicable. That goes well beyond the industry-standard three- and five-year measures. In 2015, Willcox extended that measure to all portfolio managers around the globe. Analysts are also judged on longer-term performance. The core U.S. equity research team, long headed by firm veteran Helge Skibeli, is notable for the tenure of its more than 40 domestic-stock analysts, many of whom stay on an analyst career path. This analyst team is integral to the success of core funds such as JPMorgan U.S. Equity and runs an sleeve within that strategy. Skibeli had previously headed investment teams in Asia, and before that he was an analyst in the London office. He was recently named global head of developed-markets equity research and is charged with bringing together best practices among more than 200 analysts based in 11 cities in the U.S., Europe, and Asia.

The firm's fund business boomed in the wake of the financial crisis, perhaps because parent company JPMorgan Chase was initially lauded as a conservative bastion. JPMorgan Core Bond, which fared well in 2008 thanks to strong risk management and credit research, drew notice, and the fund is now by far the firm's largest at nearly $30 billion in assets. The launch of former hedge fund manager Bill Eigen's

The firm's assertive distribution effort is centered on education, with J.P. Morgan wholesalers styled as "client advisors." This effort is best represented by the well-regarded quarterly Guide to the Markets, a book of charts illustrating market-trend data. Economist David Kelly is the face of this program, and to many advisors, his name may be better known than those of the firm's fund managers. Kelly doesn't tout individual funds, and his regular "market insights" calls draw a large audience. The firm hopes to replicate this success with similar guides for advisors globally. Meanwhile, a Guide to Retirement has a growing audience and complements an increasing emphasis on the "Solutions" group of multiasset investments.

A Fund for Every Investment Style An array of about 120 J.P. Morgan funds should have something for almost any slot a U.S. advisor might seek to fill, and global offerings are also diverse. The fund complex covers the major Morningstar Style Box categories and asset classes and includes a sampling of specialty strategies such as single-country and commodities funds. 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. Given the broad range of offerings, a number of J.P. Morgan funds are likely to be in favor during a particular market environment, reducing reliance on any one investment strategy or team.

The quality of these offerings does vary. Morningstar's U.S. analysts rate 11 individual funds, and nine of them earn Morningstar Analyst Ratings of Gold, Silver, or Bronze. The four-fund Investor series has a Morningstar Analyst Rating of Neutral, but the more popular SmartRetirement target-date series receives a Silver rating. The better funds have tended to draw the most assets, warranting analyst coverage by Morningstar (although JPMorgan Strategic Income Opportunities is rated Neutral). Morningstar's coverage of funds distributed in Europe and Australia also includes a fair number of Medalists.

The lineup as a whole is more middling than this cluster of medalists might suggest, however. For those funds distributed in the U.S., the average Morningstar Rating, a measure of past risk-adjusted performance, was 3.2 stars out of 5 at the end of January 2016. The firm's five-year success ratio at the end of 2015 was 48%, meaning that about half of J.P. Morgan funds distributed in the U.S. both survived and beat the majority of their Morningstar Category peers during the past five years. The largest firms tend to fare worse on this measure than smaller boutiques, but T. Rowe Price had a five-year success ratio of 82%, while Vanguard was at 74% and American Funds was at 70%.

J.P. Morgan's success ratios are held down partly because the firm has aggressively launched new funds and then cut those that didn't take off. JPMorgan India, for example, was liquidated because it didn't draw a significant asset base in the U.S., although versions that J.P. Morgan offers in other markets are popular. In 2015, several funds were liquidated or merged, including JPMorgan International Currency, owing to low client demand, and JPMorgan Alternative Strategies, a decision based on investment merit. The 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 beginning in 2007 caught its managers off guard. The fund had steep losses in 2008, and the following year it was merged into a fund run by members of the Columbus, Ohio, fixed-income team, which runs flagship fund JPMorgan Core Bond. The Columbus fixed-income group landed at J.P. Morgan after the Bank One merger in 2004. To its credit, J.P. Morgan left that strong 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 U.S. fixed-income strategy in New York, while Columbus continues its successful bottom-up approach. Both are under Bob Michele, but the research teams have remained distinct to protect the complementary approaches.

The equity platform encompasses three broad types of approaches. There are funds supported by J.P. Morgan's core analysts, who rank stocks using the firm's proprietary dividend discount model. (The largest of these is Silver-rated JPMorgan U.S. Equity, 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 Gold-rated JPMorgan Mid Cap Value and Bronze-rated JPMorgan Large Cap Growth. This diversity partly explains why J.P. Morgan has more than one fund in some categories.

These funds also support the firm's SmartRetirement target-date series, which provides exposure to more than 20 J.P. Morgan funds, including multiple funds in the same category. For example, the series owns more than one foreign large-blend fund: JPMorgan International Equity JNEMX is driven by fundamental, bottom-up equity research, while JPMorgan Intrepid International JFTIX relies on quantitative models. The SmartRetirement portfolio managers believe that owning complementary strategies in the same category can help stabilize returns through different market environments.

An Ever-Evolving Lineup George Gatch, head of global sales for the investment management business, continues to focus on optimizing the product lineup, and that effort was made a priority in 2014 when Jamie Kramer was named global head of strategic product management. Kramer has continued efforts to winnow out lackluster offerings, and new funds have to pass muster with a product development leadership team that includes senior members of the investment team and distribution heads. New strategies must be likely to persist through market cycles, a hurdle that sets a higher standard and may help to improve the firm's success ratios. Some of the funds likely would not be introduced by the firm today but have dedicated shareholder bases, such as the tiny JPMorgan Ohio Municipal Bond HLOMX and the passive JPMorgan Equity Index HLEIX, both acquired along with Bank One. While some of these legacy offerings will linger on, the goal overall is a smaller, cleaner lineup.

That said, the firm is clearly committed to growing its investment management business. While it has liquidated or merged around 50 funds since 2008, it has launched more than 40 during that time. This unabashed push is not inevitably a sign of shareholder unfriendliness, and the firm has the resources to tackle a variety of strategies. Some of these offerings are in areas of demand, such as JPMorgan Income JGIAX, a multisector bond fund launched in 2014. The firm is steering clear of areas where it lacks sufficient research support, such as high-yield municipal bonds, and has moved deliberately when incubating home-grown alternative strategies, an area where funds are sometimes rushed to market to catch trends. JPMorgan Multi-Manager Alternatives JMMAX, launched in late 2014, brings in subadvisor expertise. (J.P.Morgan Asset Management expanded its presence in alternatives when it acquired Highbridge Capital Management 2004, but it brought one disappointing Highbridge mutual fund in-house and liquidated 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. There are two small-cap funds closed to new shareholders, and JPMorgan Mid Cap Value closed in early 2013. Two more funds closed in 2014: JPMorgan Mid Cap Equity JCMAX and JPMorgan U.S. Large Cap Core Plus JLCAX, a long-short fund run by the U.S. equity team. A micro-cap fund was liquidated in 2008, and there are no plans to introduce other offerings in this end of the market-cap spectrum, an acknowledgement that a strategy with a capacity of $500 million is better left to boutiques.

JPMorgan Strategic Income Opportunities has been flooded with cash at times, however, and the firm simply slowed the spigot by easing up on marketing. Asset growth is a particular concern here because the fund was not built on the extensive research base supporting most of the rest of the family. While manager Bill Eigen is able to call on expertise across the J.P. Morgan complex and does lean on the firm's Cincinnati-based high-yield team, he operates independently (reporting directly to Willcox, not up through Michele). His core team isn't as deep as some key competitors', though it has expanded. When the fund's chief risk officer left in 2015, risk functions were taken on at the firm level. While this fund is a something of an outlier in the lineup, it still represents a significant portion of J.P. Morgan shareholders.

The firm is heavily promoting ventures that go beyond the individual mutual fund business but are supported by existing resources. These fall under the Solutions banner and include retirement offerings; Anne Lester, lead manager on the SmartRetirement target-date series, is the global head of retirement solutions. It also includes the firm's small but growing exchange-traded fund business, headed by Bob Deutsch; these actively managed strategic-beta ETFs use proprietary factor models and build off the firm's fundamental research strengths. This effort is currently focused on ETFs sold in the U.S. but may eventually extend to Europe.

Parent company JPMorgan Chase provides deep pockets and a global presence that benefit the asset management arm. Investment professionals on the U.S. research team enhance their perspective working with colleagues in Europe and Asia. They've also been able to count on having the resources they need even in lean times. While there is a background concern that JPMorgan Chase might pressure the asset management business to grow unsustainably or cut corners, Erdoes has noted that she has never been pushed to increase profit margins at the expense of fund shareholders and has had the resources necessary to support the investment team even during lean years while building out advisor-education efforts. The corporate board has also approved Erdoes' plans to shift portfolio-manager deferred bonus compensation from company stock to money invested in the managers' own mutual funds--an acknowledgement of the importance of manager investment that is part of the Morningstar Stewardship Grades and Morningstar Analyst Ratings.

J.P. Morgan Asset Management's Corporate Culture grade of B recognizes a strong investment culture supporting a roster of funds that largely range from sound to excellent. The shop continues to grow while sorting through the weaker spots in its lineup. However, the firm has established itself as a reliable steward of capital.