JPMorgan Core Bond R6 JCBUX

JPMorgan Core Bond comanager Steven Lear and U.S. CIO of the firm’s Global Fixed Income Currency & Commodities platform will retire in March 2024. Research veteran Kay Herr will succeed Lear as the head of U.S. fixed income in October 2023 and leave her post as head of credit research for GFICC to do so. She joined JPMorgan in 1999 as a research analyst. In conjunction with this leadership change, the firm named Andrew Melchiorre and Edward Fitzpatrick as comanagers on the strategy. Melchiorre, a structured credit specialist, joined the firm in 2012 and comanages the JPMorgan Mortgage-Backed Securities Fund OMBIX. Fitzpatrick joined in 2013 and manages government portfolios on the international rates team. This does not change Morningstar's ratings on the strategy led by JPMorgan veteran and head of the value-driven team, Rick Figuly, who draws on a deep team of veteran comanagers.

JPMorgan Core Bond’s strengths include seasoned portfolio managers, the vast resources of its global platform, and a dependable approach. The strategy, which also includes the Europe-domiciled JPMorgan U.S. Aggregate Bond, earns a Morningstar Analyst Rating of Silver for its cheapest share class; its costlier shares are Bronze and Neutral.

Portfolio manager Rick Figuly, a multidecade firm veteran and head of JPMorgan’s U.S. Core Bond team, joined this strategy in 2015 when its longtime portfolio manager retired. Justin Rucker and U.S. fixed-income CIO Steve Lear joined him in 2019 and 2021, respectively. The team boasts enviable resources with seven generalist core managers that average more than two decades of industry experience. They are backed by the firm’s global common platform that includes a well-staffed global credit research team led by veteran Key Herr. This cohort includes 19 investment-grade credit, seven securitized, 21 high-yield, and various other fundamental and quantitative analysts.

The team relies on diligent sector allocation and security selection to drive its value-driven approach, including a long-standing bias to securitized debt of various structures, and corporate bonds, over U.S. Treasuries. Rather than making big interest-rate bets, the team keeps overall duration within 10% of the Bloomberg US Aggregate Bond Index but tries to exploit relative value opportunities along the yield curve. Its securitized stakes differentiate this strategy from peers and its benchmark, an allocation that has included everything from plain-vanilla mortgage passthroughs to commercial mortgage-backed securities, to out-of-benchmark agency collateralized mortgage obligations and nonagency MBS. Over 2022, the fund remained defensive, finding better relative value in agency MBS, increasing this stake while shedding exposure to investment-grade corporate bonds.

Consistent performance is a hallmark here. Strong absolute and risk-adjusted performance over Figuly’s tenure reflects this value-driven approach. Since his first full month on the strategy in October 2015, the US-domiciled fund’s R6 share class’ 1.56% annualized return through March 2023 beat the Aggregate Index’s 1.15% and its unique intermediate core bond Morningstar Category median peer’s 1.18%. While this ranked in the upper quintile of peers, volatility-adjusted performance was just as strong.

Frequent formal and informal collaboration among this team of generalists to identify strong relative value opportunities drive decision-making. The process 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. A combination of proprietary models and insights of seasoned sector specialists support bottom-up security selection.

The fund leverages the team’s securitized credit expertise, typically overweighting various types and structures versus its benchmark and typical intermediate core bond category rival. Securities must be investment-grade at the time of purchase; therefore, the team avoids taking on significant credit risk. The portfolio has historically featured 30%-65% of assets in agency MBS, 15%-40% in corporate and securitized credit, and 25%-35% in U.S. Treasuries.

Overall duration, a measure of interest-rate sensitivity, is not a big driver of excess returns and typically within 10% of that of the Aggregate Index. Rather, the team strives to incrementally add value with its yield-curve bets and favorable convexity profile.

The team’s long-standing bias to securitized debt has held true over the years. Exposures to these bonds of various structures during Rick Figuly’s tenure has accounted for about 40%-50% of the portfolio’s market value versus about 30% of the Aggregate Index. While the team favors higher yielding sectors, it still maintains a healthy allocation U.S. Treasuries of 25%-30%, but less than the 40% featured in the benchmark. Investment-grade corporate bonds round out the fund’s sector exposures, typically between 24% and 30% of assets.

This strategy typically makes smaller, measured changes over time when they find good relative value. This was the case in 2022 when spreads broadly widened but the team found better value in agency MBS. Coming into the year, the U.S.-domiciled fund’s 30.5% corporate bond stake fell to nearly 24% by year-end and the team leaned into better relative value in agency MBS, which rose by about 3.5 percentage points to 27.1%.

As of February 2023, exposures to agency MBS (28.3%), nonagency MBS (5.8%), commercial MBS (5.7%), and asset-backed securities (6.4%) differentiate this strategy from its peers and benchmark. The roughly 6% allocation to nonrated bonds primarily consists of securitized debt; JPMorgan’s credit research team’s internal ratings deemed these to be investment-grade rated. The team lengthened duration throughout 2022 as yields rose. It began the year near 6 years, underweight about 0.5 year versus the index, but ended neutral to the benchmark at around 6.1 years.

Figuly started at JPMorgan in 1993 and rose up to head the U.S. core bond team in late 2019. He has led this strategy since 2015 when its longtime lead manager Doug Swanson retired. Two-decade veteran Justin Rucker joined the strategy in 2019 and brings his securitized debt background. They added U.S. fixed-income CIO Steve Lear in 2021 for depth, his top-down inputs, and integration of the firm’s widespread fixed income resources.

Alongside the comanagers are seven generalist core portfolio managers that average more than two decades of industry experience, as well as two associates. While some have sector specialties, the team’s generalist approach drives its relative value mindset to understand multiple areas of the bond market and encourage cross-pollination of ideas. The firm’s global common platform includes its well-staffed credit global research team led by veteran Key Herr. This cohort includes 19 investment-grade credit, seven securitized, 21 high-yield, and various other fundamental and quant analysts. The portfolio management and credit research teams have remained stable over the past year with no departures material to the strategy.

Fund ownership stands out; Figuly and Lear each invest at least $1,000,000 and Rucker at least $500,000 in the U.S.-domiciled version of the strategy.

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.

Since Rick Figuly’s first full month on the strategy in October 2015, the U.S.-domiciled fund’s R6 share class’ 1.56% annualized return through March 2023 beat the Aggregate Index’s 1.15% and its unique intermediate core bond category median peer's 1.18%. While this ranked in the upper quintile of peers, volatility-adjusted performance was just as strong; the fund’s Sharpe ratio (a measure of risk-adjusted returns) was better than the benchmark and ranked in the upper quintile. That it achieved this result with lower volatility relative to peers speaks to the team’s ability to effectively select securities with stable cash flows and manage overall risk.

The strategy also boasts enviable calendar-year performance, landing at the 50th percentile or higher in 11 of the past 15 years, and when it lagged its median rival never fell below the bottom third of peers. The strategy has also held up during credit selloffs; when corporates sold off in the beginning of 2020, the strategy kept pace with its typical peer but ended the year returning 8.28%, about 0.5 percentage point better than its median rival.

Over the past year through March 2023, amid sharply higher yields and wider credit spreads, the R6 share class' 3.95% loss was less severe than its benchmark’s 4.61% and median peer’s 4.89% drop, led by strong security selection in agency MBS and ABS sectors.

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 Analyst Rating of Silver.