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JPMorgan Hedged Equity 2 A JHDAX

Medalist Rating as of | See JPMorgan Investment Hub
  • NAV / 1-Day Return 16.74  /  +0.18 %
  • Total Assets 4.8 Bil
  • Adj. Expense Ratio
    0.850%
  • Expense Ratio 0.850%
  • Distribution Fee Level Low
  • Share Class Type Front Load
  • Category Options Trading
  • Alt Style Correlation / Relative Volatility High/Medium
  • Min. Initial Investment 1,000
  • Status Open
  • TTM Yield 0.67%
  • Turnover 35%

USD | NAV as of Mar 27, 2024 | 1-Day Return as of Mar 27, 2024, 10:20 PM GMT+0

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Morningstar’s Analysis JHDAX

Medalist rating as of .

Reliable execution of a thoughtful strategy.

Our research team assigns Bronze ratings to strategies they’re confident will outperform a relevant index, or most peers, over a market cycle on a risk-adjusted basis.

Reliable execution of a thoughtful strategy.

Analyst Lan Anh Tran

Lan Anh Tran

Analyst

Summary

JPMorgan Hedged Equity Fund 2 and 3 provide investors with smoother equity returns by tempering both downside and upside returns via a systematically implemented options strategy. Consistent execution by an experienced team and reasonable fees add to their strengths.

JPMorgan launched Hedged Equity Funds 2 and 3 shortly before soft-closing the original Hedged Equity fund in March 2021. They all follow the same portfolio construction process but with different schedules for implementing the three-month option overlays. Instead of purchasing options on the last business day of the quarter, Hedged Equity Fund 2 purchases them on the last business day in January, April, July, and October, and Fund 3 trades its options on the last business day in February, May, August, and November.

The managers start with an equity portfolio that closely mimics the S&P 500 but with small tilts toward stocks they believe are attractively priced. To temper downside risk, the team purchases put options with strike prices 5% below the S&P 500’s market value at the start of each three-month period. To offset part of the cost of the put option, the team first sells put options 20% out-of-the-money. This structure should generally protect the fund from losses between 5% and 20% in any given three-month period. If markets fall less than 5%, the fund should closely track the S&P 500. If the market falls more than 20%, the fund will begin participating in losses once again, maintaining a roughly 15-percentage-point advantage over the market. To further offset the cost of the long put position, the team also sells call options that generate enough option premium income to cover the remaining cost of the hedge.

Hamilton Reiner runs the show here. The lead manager and architect of the strategy joined JPMorgan in 2009 and has more than three decades of equity and options trading experience. He is supported by comanager Raffaele Zingone and more than 20 JPMorgan equity analysts who implement the low-tracking-error equity portfolio the options are built around.

As designed, the options overlay tempers upside returns in exchange for downside protection, leading to both funds outperforming the S&P 500 during the 2022 meltdown. Over the short term, the return profiles may vary from the original Hedged Equity fund depending on the price path of the S&P 500, but over the long run, all three funds should have very similar risk/reward characteristics. Reasonable fees coupled with JPMorgan’s transparent process make these funds a strong option to help investors remain invested during challenging markets.

Rated on Published on

The disciplined execution of a thoughtful construction process results in consistent outcomes that investors can count on.

Analyst Lan Anh Tran

Lan Anh Tran

Analyst

Process

Above Average

The fund earns an Above Average Process rating.

The fund’s option overlay strategy narrows its outcome path and provides a smoother ride to equity investing. It starts with an equity portfolio that resembles the S&P 500 before overlaying an options strategy that limits downside at the expense of forgoing upside. The team then purchases 5% out-of-the-money put options and sells 20% out-of-the-money put options on the S&P 500. This structure, called a put spread, protects against S&P 500 losses in the range of negative 5% to 20% in a given three-month period. The put spread is cheaper than buying the 5% out-of-the-money put outright, but it saddles investors with S&P 500 losses beyond 20%.

The manager also sells a call option to cover the price of the put spread so that the full options position does not incur a cost. The call options are usually sold 3.5%-5.5% out-of-the-money depending on the net cost of the put spread. Calls command a higher price during periods of heightened volatility, allowing the fund’s managers to sell calls at a higher strike price. The strike price at which the calls are written determines the strategy’s upside cap for the three-month hedged period.

The team intends to generate a small level of alpha in the equity portfolio by modestly overweighting attractively priced stocks and slightly underweighting expensive stocks based on fundamental analysis. Since the constitution of the equity portfolio closely resembles the S&P 500, the index options remain a representative hedge.

The strategy’s equity portfolio should track the S&P 500 closely as it constrains tracking error to 1.5% annually. Though it aims to outperform the index, individual stock exposure can only deviate within a 1-percentage-point range. The strategy uses a dividend discount model that ranks stocks from most attractive to least attractive based on earnings forecasts and company-specific growth catalysts. The team creates a well-diversified portfolio that mitigates risks inherent to any one holding, with the resulting portfolio constituting around 200 stocks. Sector weightings resemble the S&P 500, with a slight underweighting in communication services and overweighting in consumer discretionary stocks.

The team constructs a zero-cost option overlay that resets every three months. Call options fetch a higher premium when interest rates are higher, thus improving the strategy’s upside in the current market environment. The recent spike in volatility was also a tailwind for call option sellers. In the second quarter of 2020 and toward the end of 2022, call options had a strike price closer to 7% out-of-the-money. In periods of serious market stress where the index drops more than 20%, its short out-of-the-money put will expose the fund to additional losses. Though it will lose about 15 percentage points less than the S&P 500, it is not completely insulated from large drawdowns.

Investors should also note that intraperiod performance will vary, given that option pricing is dynamic until expiration. Options’ values are marked to market daily, which often results in deviations from the three-month return.

Rated on Published on

A small yet experienced management team that leverages JPMorgan’s deep resources earns this strategy an Above Average People rating.

Analyst Lan Anh Tran

Lan Anh Tran

Analyst

People

Above Average

The core team tasked with managing this strategy is small, but concerns about its size are mitigated by its access to a strong support team and its systematic implementation of the options overlay strategy. Lead portfolio manager and strategy architect Hamilton Reiner joined the firm in 2009 and has three decades of experience in derivatives markets. Before joining JPMorgan, Reiner held senior positions across Wall Street at Barclays Capital, Lehman Brothers, and Deutsche Bank, and he spent the first 10 years of his career at O’Connor and Associates, an options specialist firm. He is supported by two junior portfolio managers, who joined from the ranks of the equity analyst team, and a strong supporting institutional framework at JPMorgan.

Raffaele Zingone, the other named portfolio manager, joined the firm in 1991 and is responsible for implementing the equity strategy. He directs JPMorgan's deep bench of more than 20 equity analysts, who average 21 years of industry experience. Consistent with groups this size, there has been modest turnover on the analyst team. Reiner and Zingone both invest more than $1 million alongside investors, signaling a strong alignment of interest between management and fundholders.

Rated on Published on

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

Associate Director Emory Zink

Emory Zink

Associate Director

Parent

Above Average

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.

Rated on Published on

Over the long run, JPMorgan Hedged Equity Fund 2 and 3 should have a similar risk/ reward profile to the original Hedged Equity fund, but there will be short-term deviations owing to path dependency.

Analyst Lan Anh Tran

Lan Anh Tran

Analyst

Performance

The S&P 500’s level at the beginning and end of each three-month period will dictate whether the options expire in-or out-of-the-money, and the implied volatility when the options are written will determine the upside potential for each fund. The different schedules that each fund has for their three-month outcome periods rely on the differing price paths of the S&P 500.

From their launch at the end of February 2021 through August 2023, the institutional shares of Fund 2 and 3 have returned 5.97% and 3.8%, respectively. Their risk-adjusted returns over this period (as measured by Sharpe ratio) were 0.39 and 0.24, respectively, compared with 0.34 for the options-trading Morningstar Category average. Though the options overlay shines during large drawdowns, the fund is still exposed to similar downside to the index if the S&P 500 loses up to 5% in the three-month period. While Fund 2 materially benefited from the S&P 500’s 8.17% drop between February and April 2022, the index’s worst loss during any of Fund 3’s three-month hedged periods was only 5.16%.

Nonetheless, the funds have both added value when they’re expected to. During the market meltdown throughout 2022, Fund 2 and 3 outpaced the S&P 500 by 4.79 and 3.61 percentage points, respectively. They did this with substantially lower volatility: Their standard deviations of returns in 2022 were only around half of the index’s figure. From their 2021 inception through August 2023, they managed to capture more than 52% of the index’s upside returns and limited downside capture to 52%.

Published on

It’s critical to evaluate expenses, as they come directly out of returns.

Analyst Lan Anh Tran

Lan Anh Tran

Analyst

Price

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 Medalist Rating of Bronze.

Published on

Portfolio Holdings JHDAX

  • Current Portfolio Date
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  • Bond Holdings
  • Other Holdings
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