JPMorgan Government Bond R2 JGBZX

JPMorgan Government Bond’s experienced securitized specialists follow a disciplined process focused on mortgage-centric government bonds; the strategy earns a Morningstar Analyst Rating of Silver for its cheapest share classes and Bronze and Neutral for its most expensive.

This team’s experience, depth, and expertise in agency mortgage-backed securities differentiates this team versus rivals. Comanagers Michael Sais, who has been with this fund since 1996, 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 agency mortgage-backed securities stands out versus its U.S. Treasury-focused benchmark and intermediate government Morningstar Category peers, and it relies on these sector differences to add value. 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 agency mortgage-backed securities of varying types and structures. Agency-backed residential and commercial mortgages (45%-65%) typically comprise the lion’s share of the portfolio, with U.S. Treasuries (15%-30%) and agency debt (3%-20%) taking a supporting role. While many of its peers emphasize more-traditional MBS passthroughs and hold smaller U.S. Treasury stakes, this team seeks to control duration extension and contraction by emphasizing collateralized mortgage obligations or commercial mortgage-backed securities that minimize prepayment sensitivity and with more predictable cash flows.

The comanagers have successfully used their security-selection acumen to seek pass-throughs with strong fundamentals and to rotate between residential and commercial CMOs where they perceive attractive relative valuations. From January 1997 through August 2022, the Institutional share class generated 4.2% annualized, landing in the top decile of its distinct category peers. However, the ride here may be bumpier at times versus shorter duration rivals.

The team’s robust process, with a focus on bottom-up security analysis across the agency mortgage spectrum and disciplined duration positioning, supports 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.

Given this strategy’s mortgage focus, agency-backed residential and commercial mortgages (45%-65%) typically comprise the lion’s share of the portfolio with U.S. Treasuries (15%-30%) and agency debt (3%-20%) taking a supporting role. Agency MBS is routine in this and competitor portfolios, but Michael Sais and Robert Manning emphasize mortgage pools and structures with favorable prepayment characteristics and stable cash flows, whereas the typical intermediate government Morningstar Category peers favor plain-vanilla agency pass-throughs. The team emphasizes CMOs and positively convex structures such as multifamily pools it believes offer superior prepayment protection. The managers limit the use of more-complex and volatile interest-only and principal-only derivatives.

The strategy stays true to its original intent to keep duration, a measure of interest-rate sensitivity, within a 5.0- and 5.5-year band, typically shorter than its index but longer than its typical peer.

Unlike its Bloomberg U.S. Government Index, this strategy holds a much more modest allocation to U.S. Treasuries and instead invests heavily across the mortgage spectrum. The strategy’s typical U.S. Treasury and agency debt allocation is around 30% of assets compared with 100% of its index. Agency-backed securitized debt comprises the remainder of the portfolio; its 62% stake as of June 2022 has risen steadily from around 50% over the past five years.

The managers have long emphasized agency residential CMOs (22% as of June 2022) because of their more predictable cash flows over residential pass-throughs (18%); wider agency spreads since the beginning of 2022 compelled them to increase their residential allocation to 40% from 37%. The team favored these positions over low-yielding U.S. Treasuries and agencies, and while their agency commercial mortgages (22%) have remained relatively unchanged, they rotated out of commercial CMOs in favor of better value in multifamily pass-throughs. The managers typically keep between 3% and 6% in cash for liquidity.

As of June 2022, the strategy’s 5.7-year duration was slightly longer than its typical rival’s 5.6 years but shorter than its benchmark’s 6.3 years. The stability of this fund’s duration is notable while its peer median duration has fluctuated wildly between 3.5 and 5.9 years since mid-2020. The managers have allowed duration to drift above its upper band more recently, but don’t expect it to exceed six years.

Veteran portfolio managers and the collective expertise of JPMorgan’s seasoned mortgage 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 1997. 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 in 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. Sais shares in the fund’s performance, with a personal investment in the strategy exceeding $1 million.

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 long-term performance is strong because of the managers’ deft allocation and security decisions within its relatively narrow mandate.

Over Michael Sais’ long tenure between January 1997 through August 2022, the Institutional share class’ 4.2% annualized return outpaced its typical intermediate government Morningstar Category median rivals’ and Bloomberg U.S. Government Index’s 3.8% and 4.0%, respectively. Its Sharpe ratio, a measure of risk-adjusted returns, landed ahead of three fifths of its distinct category peers. The fund’s structural biases to mortgage-backed securities versus its 100% U.S. Treasury and agency debt index and the team’s ability to source attractively valued bonds have helped generate a yield advantage and deliver strong long-term performance. However, investors may experience a bumpier ride with duration, a measure of interest-rate sensitivity, which is typically longer than peers.

The fund’s longer-than-peer duration typically results in underperformance versus rivals when U.S. Treasury yields spike. For example, during the interest rate shock of early 2021, the fund’s 3.0% loss was more severe than the 1.8% loss of its peer median. However, in normal or falling rate periods, the strategy tends to outpace rivals as it did in 2020 when its 6.9% return beat its peer median’s 5.7%.

For the year to date through August 2022, the strategy’s 9.2% drop lagged rivals by about 60 basis points primarily because of its longer duration as long-term U.S. Treasury yields rose but held up better than the benchmark’s 9.9% loss.

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 costliest quintile. Such high fees stack the odds heavily against investors. Based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we don’t think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Neutral.