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JPMorgan Core Plus Bond R6 JCPUX

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Morningstar’s Analysis

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An expansive and well-resourced core-plus enterprise.

Our analysts assign Silver ratings to strategies that they have high conviction will outperform a relevant index, or most peers, over a market cycle.

An expansive and well-resourced core-plus enterprise.

Senior Analyst

Summary

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JPMorgan Core Plus brings to bear the best of the firm's fixed-income resources under the banner of a cadre of experienced managers. Its cheapest share classes earn a Morningstar Analyst Rating of Silver, while its more expensive share classes receive Bronze or Neutral ratings.

While this strategy had long benefited from the in-depth, bottom-up work of well-resourced and seasoned security analysts, the standardization of reporting and risk systems across its disparate investment hubs of the firm enable the five comanagers here to orchestrate the portfolio nimbly up top. Managers Steve Lear and Andrew Norelli, who joined the strategy in late 2013 and early 2014, respectively, co-lead the strategy and make broad asset-allocation decisions based on macroeconomic data and input from their fellow, sector-focused comanagers. While Rick Figuly, who works with the securitized team, has sat on the fund's roster since 2006, Lisa Coleman (representative of the investment-grade credit team) and Tom Hauser (representing the high-yield team) only joined this effort in July 2020. All five of these managers have well over a decade of investing experience and long careers at the firm.

Thanks to its comfort with high-yield fare, the strategy falls into the intermediate core-plus bond Morningstar Category and packs a little more punch than its Bloomberg U.S. Aggregate Bond Index benchmark. It typically holds between 5% and 20% of assets in junk-rated corporates (the index holds none and many peers keep that exposure under 10%, while this strategy has met that limit at times); up to 10% in emerging-markets debt; and 35% to 50% in agency and nonagency securitized fare. Though Lear and Norelli lean on their robust bench of research personnel for idea generation and security recommendations, they actively engage with the portfolio and don't hesitate to block issuers they don't see as having attractive valuations.

Over time, this marriage of top-down and bottom-up sensibilities has paid off. Since Norelli took the effective lead on the strategy, its institutional share class generated 3.8% annualized between April 2014 and September 2021, outperforming both its index but roughly matching its typical rival. It generated this result, however, with a top-quintile risk-adjusted return (as measured by Sharpe ratio).

Process

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A shrewd bottom-up approach to security recommendations, combined with a thoughtful macro overlay, result in an Above Average Process Pillar rating.

Since 2013, J.P. Morgan has encouraged collaboration and integrated resources across its various teams, including a value-driven mortgage and investment-grade credit group based in Columbus, Ohio and New York, its high-yield effort run out of Indianapolis, and its macro-focused cohort also in New York. While this strategy had long benefited from the in-depth work of well-resourced and seasoned bottom-up security analysts, the standardization of reporting and risk systems across these investment hubs, coupled with more frequent and robust research discussions, enable the five comanagers here to orchestrate the portfolio more nimbly up top.

Steve Lear and Andrew Norelli work with their sector-focused comanagers and the firm’s broader research teams to make allocation decisions here. While they will lean on their broad analyst pool for security recommendations, they won't hesitate to push back against calls where they fail to see attractive valuations. Over time, this has led to a strategy that packs more punch than its Bloomberg U.S. Aggregate Bond Index benchmark, holding between 5% and 20% in junk-rated corporates, up to 10% in emerging-markets debt, and 35% to 50% in securitized fare.

People

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This strategy unites JPMorgan’s robust analytical resources under a set of experienced managers, underpinning an Above Average People Pillar rating.

The management roster here reflects the thorough mix of top-down and bottom-up analysis driving the strategy. Steve Lear and Andrew Norelli, who joined the strategy in late 2013 and early 2014, respectively, co-lead the strategy and make broad asset-allocation decisions based on macroeconomic data and input from the firm’s various sector specialists. The three remaining managers each represent a specialist team from their firm's wide reach. While Rick Figuly, who works with the securitized team, has sat on the fund's roster since 2006, Lisa Coleman (representative of the investment-grade credit team) and Tom Hauser (representing the high-yield team) only joined in July 2020. All five of these managers have well over a decade of investing experience and long careers at the firm.

Lear and Norelli's appointments reflected an emphasis on the firm's part to unite its previously disparate fixed-income resources (which would often compete with one another) under one effort. Though some turnover followed the reorganization and has continued to be intermittent over the past few years, today the expansive team that Lear and Norelli work with sports over 50 analysts and a bevy of dedicated traders, quantitative analysts, and risk personnel.

Parent

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J.P. Morgan Asset Management’s strong investment culture, which shows through its long-tenured, well-aligned portfolio managers and deep analytical resources, supports a renewed Above Average Parent rating.

Across asset classes and regions, the firm's diverse lineup features many Morningstar Medalists, such as its highly regarded U.S. equity income strategy that’s available globally. There's been some turnover in the multi-asset team recently, but it remains deeply resourced and experienced. Manager retention and tenure rates, and degree of alignment for U.S. mutual funds compare favorably among the competition. Managers' compensation emphasizes fund ownership over stock ownership, which is distinctive for a public company.

The firm continues to streamline its lineup and integrate its resources further. For instance, in late 2019, the multi-asset solutions division combined with the passive capabilities. The firm hasn’t launched trendy offerings as it’s mostly expanded its passive business lately, but acquisition-related redundancies and more hazardous launches in the past weigh on its success ratio, which measures the percentage of funds that have both survived and outperformed peers. Fees are regularly reviewed downward globally; they're relatively cheaper in the U.S. than abroad. Also, the firm is building its ESG capabilities and supports distinctive initiatives on diversity.

Price

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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.

Performance

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This strategy has proved an able performer with an eye on downside risk. Over lead manager Andrew Norelli's tenure from April 2014 through September 2021, the strategy’s institutional share class generated 3.8% annualized, outpacing its Bloomberg U.S. Aggregate Index benchmark's 3.3% but roughly matching the median result of a distinct cohort of its intermediate core-plus bond category peers. On a risk-adjusted basis (as measured by Sharpe ratio), however, the picture is even brighter: The strategy outpaced both its bogy and 80% of its rivals over the same period.

A broad investment menu and the flexibility to nimbly rotate in and out of sectors mean that the profile here heavily depends on the calls of its managers. In this regard, 2020 was a mixed year for the strategy. Norelli entered the year with a risk-off orientation, believing that credit markets were trading with extremely tight spreads. This boosted the strategy when credit markets collapsed between Feb. 20, 2020, and March 23, 2020 with the impact of the COVID-19 pandemic, and it held up better than 70% of its rivals over that period. Yet when credit markets came roaring back over the rest of the year, Norelli and his team's reluctance to add to credit risk contributed to the strategy lagging; over calendar-year 2020, the strategy's 7.9% return lagged 60% of its rivals. More recently, the team's anticipation of higher-than-expected inflation and caution around duration risk has contributed to strong results: for year-to-date 2021, the strategy's 0.3% loss was less severe than around 65% of its cohort.

Portfolio

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Typically, this strategy underweights U.S. Treasuries relative to its Bloomberg U.S. Aggregate Bond Index benchmark, redistributing the difference (18% of assets as of July 2021 versus its benchmark’s 40%) across corporates and securitized fare. The team's 23% stake in investment-grade credit as of July 2021 was also underweight that of its bogy (28%), as the team felt that investment-grade credit wasn't as attractive on a broad basis given how much spreads had tightened after the first quarter 2020 coronavirus-related sell-off. On the other hand, the team felt that up-in-quality exposures within high-yield credit (12% from 8% a year earlier) were more attractive, with wider spreads justifying the greater level of credit risk on a name-by-name basis.

As is usually the case, the strategy's greatest deviation from its bogy and from many intermediate core-plus bond category rivals was its focus on securitized fare (44% vs. its benchmark's 30%), including a sizable stake in agency mortgages (23%). The managers reduced this stake from 29% a year earlier over concerns that spreads in the sector had tightened too much relative to how elevated prepayments remained in the mortgage market. The managers were more bullish on commercial mortgages (10%), a sector they felt had received considerable financial and policy support over the course of the pandemic.

Owing in part to concerns that accommodative monetary policy and increased government spending would lead to nontransitory inflation, the managers kept the strategy's duration (5.9 years as of July 2021) shorter than that of their bogy (6.3 years).