JPMorgan International Hedged Equity continues to deliver on its promise of a low-volatility portfolio that can help investors stay the course in volatile markets. Consistent implementation by an experienced team and reasonable fees add to its strengths.
The strategy aims to provide smoother equity returns by tempering both downside and upside returns via a systematically implemented options strategy. The managers start with an equity portfolio that closely mimics the MSCI EAFE Index 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 MSCI EAFE Index’s market value at the start of each quarter. 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 quarterly losses on the index between negative 5% and 20%. If markets fall less than 5%, the fund should closely track the MSCI EAFE Index. If the index falls more than 20%, the fund will begin participating in losses once again, maintaining a roughly 15-percentage-point advantage over the index. 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 but also cap the strategy’s upside.
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 Piera Elisa Grassi and a deep bench of equity analysts who implement the low-tracking-error equity portfolio the options are built around.
Performance divergence can emerge between this fund and its S&P 500-based counterpart, as each overlay applies to a different index. Nonetheless, the same investment philosophy holds. For example, the fund’s Institutional shares outpaced the MSCI EAFE Index by 4.93 percentage points in 2022 as it contained its loss to only 9.52%, compared with the MSCI EAFE's 14.45% decline. The fund still provides robust returns despite strong downside protection. From its 2019 inception through August 2023, the Institutional share class returned over 3.1% compared with the MSCI EAFE Index’s 5.25% return.
The same investment thesis and fees as the S&P-500-focused fund make this an interesting option for investors seeking to manage risk in global markets.