JPMorgan Limited Duration Bd R6 JUSUX

JPMorgan Limited Duration Bond’s experienced securitized specialists follow a disciplined process focused on short-term mortgage- and asset-backed bonds; the strategy earns a Morningstar Analyst Rating of Silver for its R6 share class and Bronze and Neutral for its most expensive.

This team’s experience, depth, and expertise in securitized bonds differentiates this team versus rivals. Comanagers Michael Sais, who has been with this fund since 1995, and Robert Manning, who joined in 2013, lead this effort and benefit from the support of JPMorgan’s large team of value-driven portfolio managers and fundamental analysts based in Columbus, Ohio, and New York.

The team’s heavy emphasis on securitized bonds stands out versus its Bloomberg 1-3 Year U.S. Government/Credit Index, composed of about 70% U.S. Treasuries and agencies and 30% investment-grade corporates, and typical short-term bond Morningstar Category peer. While the process begins with JPMorgan’s quarterly investment committee to form its three- to six-month macro-outlook, weekly sector meetings and daily interactions drive decision-making here. Sais and Manning apply their rigorous fundamental analysis to securitized debt of varying types and structures. As of June 2022, the portfolio held roughly 81% in agency and nonagency residential and commercial mortgages-backed securities, asset-backed securities, and collateralized loan obligations. Corporates also comprised about 10% of assets, and the team has shunned low-yielding U.S. Treasuries. The managers only buy investment-grade bonds at the time of purchase and manage duration, a measure of interest-rate sensitivity, within a one- to three-year band, but the strategy’s duration typically sits around 1.5 years, shorter than its index and peers’ 1.9 and 2.3 years, respectively (June 2022).

The managers have successfully used their security-selection acumen to seek structured bonds with strong fundamentals and to rotate between various securitized sectors where they perceive attractive relative valuations. Over the past 10 years through August 2022, the R6 share class generated 1.8% annualized, landing in the top quintile of its distinct category rivals. They also effectively managed risk over the same period with lower-than-peer volatility resulting in top-decile risk-adjusted performance, as measured by the Sharpe ratio.

The team’s robust process focuses on active sector management and bottom-up security analysis across securitized and corporate bonds to earn an Above Average Process rating.

The approach begins with JPMorgan’s quarterly investment meeting that sets macro themes for the subsequent three to six months while weekly sector meetings focus on relative value and tactical portfolio positioning. Frequent informal communication between portfolio managers and analysts drives security selection. Robust risk-management controls are embedded throughout the process.

This strategy eschews U.S. Treasuries in favor of higher-yielding bonds including agency and nonagency mortgage-backed securities (35%-70%) and corporate and asset-backed securities (10%-35%). The comanagers apply their intensive cash flow analysis to a variety of securitized bonds while targeting a short duration band between 1.0 and 3.0 years—but typically around 1.5 years, on the shorter end of its peers. The portfolio remains rooted in agency mortgages, but nonagency residential and commercial mortgages, ABS, and investment-grade corporate bonds are also consistent features here. All assets must be investment-grade at time of purchase, and most holdings (65%-80%) are rated AAA. Non-investment-grade bonds once made up a significant portion of this portfolio in the wake of the 2008 global financial crisis, but this allocation has fallen to the low single digits in recent years.

This short-term bond offering’s bias to various types of securitized bonds differentiates this strategy from its Bloomberg 1-3 Year U.S. Government/Credit Bond Index and short-term bond Morningstar Category peers. Typically, the fund invests about 80% of assets in securitized debt, but the managers effectively rotate across the various areas within this opportunity set. Investment-grade corporates and cash round out the fund while the team eschews low-yielding U.S. Treasuries.

As of June 2022, the fund’s largest allocation was to agency-backed MBS and CMBS (27%), followed by ABS (21%), CMBS (17%), nonagency MBS (11%), and CLOs (4%). These are not static allocations, and the managers actively seek better relative valuations. For example, tight spreads in agency-backed bonds caused the managers to reduce this allocation to 26% (as of June 2022) from about 41% in early 2021 while at the same time increasing its stake in better-valued nonagency CMBS to 17% from 12%. In early 2021, the managers initiated a modest allocation to CLOs as they became more comfortable with the asset class for this fund.

The team doesn’t aim to manage duration in line with its benchmark’s 1.9 years but instead to keep it steady at about 1.5 years, which stood 0.8 years shorter than its peer median as of June 2022. As such, this fund is more defensive than its index and peers when yields rise, such was the case in 2022. The managers’ emphasis on structures with stable cash flows helps minimize duration extension or contraction.

Veteran portfolio managers and the collective expertise of JPMorgan’s seasoned securitized specialists support an Above Average People rating.

The overall level of experience and specialized mortgage expertise give the team its competitive edge. Michael Sais and Bob Manning lead this strategy that benefits from a deeply experienced mortgage-backed securities team. Sais began his career at JPMorgan as an MBS research analyst and joined here as a manager in 1995. Bob Manning, a two-decade contributor to the firm’s fixed-income efforts, joined him in 2013 to add depth and lessen key-person risk.

The comanagers conduct much of their own bottom-up research and trading for the portfolio but draw on the deep team of investment-grade portfolio managers and securitized specialists across JPMorgan’s fixed-income platform for macro positioning and idea generation for opportunities that represent good relative value. This tight-knit team jointly makes portfolio decisions and works out any differences in the best interests of the fund.

This is a stable team with no recent turnover of any key contributors. It recently added two experienced securitized credit analysts who focus on CMBS and CLOs. The comanagers share in the fund’s performance, with personal investments exceeding $1 million for Sais and between $500,000 and $1 million for Manning.

A well-resourced, thoughtful, and disciplined steward of client assets, JPMorgan Asset Management maintains an Above Average Parent rating.

As of 2022, this investment stalwart manages more than USD 2.5 trillion in AUM. Composed of various cohorts globally and a diverse set of 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.

The managers’ deft allocation and security decisions that focus on sector rotation across various securitized areas has resulted in strong long-term results.

Performance for the R6 share class over Michael Sais’ tenure over September 1995 through August 2022 is in line with its Bloomberg 1-3 Year U.S. Government/Credit Index and distinct short-term bond Morningstar Category peer median. However, over the past 10 years through August 2022, the fund generated 1.7% annualized, outpacing its peer median’s 1.3% and landing in the top quintile of rivals while effectively managing risk; its lower-than-peer volatility resulted in top-decile risk-adjusted performance, as measured by the Sharpe ratio.

The fund’s structural biases to securitized bonds and shorter duration cause this offering to trail its index and typical category peer when corporate credit rallies but hold up better in periods of rising yields, aided by its shorter duration profile. It posted a top-decile return in 2018 when yields rose but lagged in 2019 and 2020 when yields reversed course. The strategy has held up well over various stress periods, especially when corporate credit is out of favor. For example, near the end of 2018 when corporate bonds sold off, this strategy’s 1.0% return beat about four fifths of rivals.

During a volatile year to date through August 2022, the R6 shares' 1.9% drop was less severe than rivals by about 80 basis points, primarily because of its shorter duration as long-term yields rose, ranking in the category’s top decile.

It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s cheapest quintile. Based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, 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.