JPMorgan California Tax Free Bond A JCBAX

JPMorgan California Tax Free Bond A boasts strong Process and People Pillar ratings, but other weaknesses hold this strategy's Morningstar Quantitative Rating at Neutral. The strategy charges fees in line with its similarly distributed peers, priced within the middle quintile.

The strategy's sensible investment philosophy merits an Above Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an underweight position in A rated bonds and an overweight in debt with 10- to 15-year maturities compared with category peers. The strategy's management team has a high retention rate, which helps continuity and earns it an Above Average People Pillar rating. The strategy belongs to a strong asset-management firm that earns an Above Average Parent Pillar rating. The firm, for example, has had a competitive lineup success ratio and overall reasonable fees.

Morningstar's style-agnostic investment process evaluation looks for strategies with a philosophy distinctive enough to generate standout results in the future. JPMorgan California Tax Free Bond Fund earns an Above Average Process Pillar rating.

Compared with other funds in the Muni California Intermediate Morningstar Category, this fund takes on lower credit risk. But in terms of long-term interest-rate sensitivity, it hews closely to its average peer. Opening the analysis to additional factors, the portfolio, over time, has displayed three biases whether toward or away from certain fixed-income instruments. First, managers have shown a consistent underweight position on A rated bonds compared to peers. Additionally, there's been a notable bias toward debt with 10- to 15-year maturities. And finally, the fund does not consistently lean toward or away from corporate debt, but the current portfolio is underweight its peers.

This strategy's 12-month yield is 1.9%, which mirrors its average peer's. In addition, its 30-day SEC yield (a measure similar to yield-to-maturity) sits at 2.5%. The portfolio has a higher average surveyed credit quality, AA, compared with the category average's A and it holds no non-investment grade assets, similar to its average peer. Strategies that take on less credit risk can often shoulder more-adverse market conditions.

Even with managers' lack of personal investments, the team managing JPMorgan California Tax Free Bond Fund stands out with minimal team turnover. This strength bolsters the strategy's Above Average People Pillar rating. Michelle V. Hallam, the longest-tenured manager on the strategy, boasts 18 years of portfolio management experience. The average Morningstar Rating of the strategies they currently manage is 2.7 stars, demonstrating, in aggregate, that they do not provide value for investors. Despite having a small team, the two listed managers boast 24 years of portfolio management experience. The team has successfully retained portfolio-manager talent, providing continuity for strategies as long-term stability tends to support positive results. There have been no documented departures within the past 10 years. None of the portfolio managers here invest in this fund. This hurts the rating because manager investment would align their interests with the strategy's investors.

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.

This strategy’s A share class has held up poorly, falling behind both its peers and the category benchmark. Over the past 10-year period, this share class lagged its average peer by an annualized 16 basis points. It also trailed the category benchmark, Bloomberg Barclays MF California Intermediate Municipal Bond Index, by an annualized 59 basis points over the same period.

Even when adjusting for risk, the fund does not hold up. The share class trailed the index with a lower Sharpe ratio, a measure of risk-adjusted returns, over the trailing 10-year period. This subpar risk-adjusted performance has not resulted in higher volatility, as measured by their standard deviation, which is close to the benchmark. Finally, the share class proved itself ineffective as it was unable to generate alpha, over the same 10-year period, against the category group index: a benchmark that encapsulates the performance of the broader asset class.

It is important for investors to be on guard for fees, as they are essentially negative alpha. This share class lands in the middle quintile of its Morningstar Category. Its average expense ratio, paired with the fund’s People, Process, and Parent Pillars, indicates that this share class could struggle to produce positive alpha compared with its category benchmark, explaining its Morningstar Quantitative Rating of Neutral.