JPMorgan Total Return C JMTCX

JPMorgan Total Return’s flexibility to differ from its benchmark and other intermediate core-plus bond Morningstar Category peers hasn’t stood out in recent years. It earns a Morningstar Analyst Rating of Neutral across most shares and Negative for its most expensive.

Bill Eigen leads the fund’s lean, albeit veteran, six-person Boston-based investment team. A manager on the fund since its mid-2008 inception, Eigen has had the sole reins for most of his tenure here, though he draws on longtime portfolio managers Jarred Sherman and Jeff Wheeler, who run the investment-grade credit and securitized sleeves, respectively. A macro strategist, assistant trader, and research analyst round out the team.

Eigen and his team operate outside of JPMorgan’s broader Global Fixed Income Currency & Commodities complex. They can, however, draw on those vast resources for idea generation and fundamental research and most often utilize the firm’s Indianapolis-based high yield team.

The process relies on multiple inputs and the macro assessment of Eigen, who brings a contrarian bent. He aims to maintain the foundational attributes of traditional core bonds with opportunistic allocations to riskier and less correlated sectors. This wide-ranging, flexible mandate can feature allocations to high-yield bonds, nonagency mortgage-backed securities, credit default swaps, and long-short relative value strategies. However, the team has avoided junk-rated credit risk more recently and continues to remain patient for more attractive opportunities.

The fund’s dialing back risk in recent years in favor of more core-oriented bonds has caused its long-term performance to lag most peers. Over the past 10 years ended January 2023, the I shares’ 1.6% annualized return trailed the distinct peer median’s 1.8% but was just ahead of its Bloomberg US Aggregate Bond Index. And while the fund exhibited lower volatility (as measured by standard deviation) than the peer norm, its volatility-adjusted performance (as measured by Sharpe ratio) was nonetheless near the bottom quartile of rivals.

The fund’s showing amid 2022’s heightened volatility did not differ much from its long-term performance pattern. Its 16.2% calendar-year loss was not any better than its typical rival’s result.

It merits an Average Process rating.

Sole manager Bill Eigen’s contrarian bent finds some expression here. He looks to maintain the foundational attributes of traditional core bonds and add value through opportunistic allocations to riskier sectors and less correlated strategies. Organic discussions amongst this close-knit team help foster portfolio ideas, but final decisions fall to Eigen. The team typically keeps the fund closer to the risk profile of the Aggregate Index during periods that offer fewer opportunities in opportunistic sectors, but in periods of elevated volatility, the strategy is willing to invest generously in extended sectors, such as non-investment-grade credit, nonagency MBS, or alternative plays within macro themes or long-short credit. The fund typically shies away from Treasuries in favor of higher-yielding exposures in investment-grade credit or agency MBS, and the team has dabbled in niche markets over the portfolio’s lifetime, including credit risk transfer securities, insurance-linked bonds, and relative value trades using credit derivatives like baskets of credit- or asset-backed default swaps (CDX and ABX).

While there is a wide band of 2.5 years around the index’s interest-rate sensitivity, the fund’s duration is typically within a year of its benchmark, consistent with Eigen’s view that predicting rates is challenging.

Despite the strategy’s multiple levers, the team has avoided pulling them in recent practice, opting for patience over delving into more adventurous sectors. High yield, the largest historical driver of excess returns, hasn’t played a significant role here since 2019, and the fund’s 1.9% allocation in December 2022 was near its all-time low. The portfolio’s defensive posture through the volatility of the past few years is notable. It missed out on significantly wider high-yield spreads after 2020’s pandemic-driven selloff, for example, by favoring investment-grade credit instead.

The market's consensus views do not sway manager Bill Eigen and he will add to risk when he is ready. The team thinks that 2023’s recession risk doesn’t reflect an attractive risk/reward trade-off in high yield, and it is content to remain patient in core strategies. For example, the fund’s 48.5% allocation to investment-grade corporates at year-end 2022 represented the fund’s largest stake, unchanged since the beginning of the year, while agency MBS exposure hovered over 30%, and its Treasuries stake rose to 10.2% from 8.4%.

This fund last looked more like a typical core-plus mandate from 2018 to 2019, when it had a mid-teens high-yield stake and a nonagency MBS allocation above 10%. Duration, a measure of interest-rate risk, has moved in tandem with the index; its 5.9-year duration was about a half year shorter than the year prior and slightly shorter than the index’s 6.2 years.

The fund earns an Average People rating.

Eigen joined JPMorgan and this fund in mid-2008 with nearly two decades of industry experience and a pedigree managing nontraditional mandates. The firm tasked him with bringing his opportunistic fixed-income investing style to the masses with JPMorgan Strategic Income Opportunities JSOSX and now heads JPMorgan’s absolute return and opportunistic fixed-income team, which operates outside of JPMorgan’s broader Global Fixed Income Currency & Commodities platform. Eigen previously led Highbridge Capital Management's fixed income group and spent 12 years at Fidelity Investments where he comanaged several multisector portfolios.

Two supporting portfolio managers, a macro strategist, one assistant trader, and one research analyst support Eigen here. Portfolio managers Jarred Sherman and Jeff Wheeler are also key decision-makers, although not named on this strategy. Sherman, an investment-grade credit specialist, brings 23-plus years of experience, while Wheeler, who has more than 25 years of industry experience, is responsible for the securitized assets for the fund.

The high turnover that plagued this team between 2017 and 2019 has given way to a more stable group over the past few years, although a research associate left in 2022.

Eigen does not invest in this fund.

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.

Over the past 10 years, the I shares’ 1.6% annualized return trailed the distinct core-plus bond Morningstar Category median peer’s 1.8% but outpaced the Aggregate Index. And while the fund exhibited lower overall volatility(as measured by standard deviation) than most peers, its volatility-adjusted performance(as measured by Sharpe ratio) was near the bottom quartile of rivals. It delivered similar relative results over the trailing three-and five-year periods.

Bill Eigen and his team strive for lower-than-benchmark volatility while delivering excess returns using JPMorgan’s vast toolbox. The fund’s longer-term bias toward high-yield credit and agency MBS over much of its life has boosted returns during periods friendly to risk, but the team’s reluctance to add to edgier bonds since 2018 caused it to lag more adventurous rivals. For example, during 2020’s coronavirus-driven high-yield selloff, Eigen opted to add to investment-grade names instead of high-yield credit as spreads blew out; its 7.0% return that quarter landed in the bottom quartile. And amid heightened volatility over the 2022 calendar year, the fund’s 16.2% loss did not fare any better than the peer median.

Based on our assessment of the fund’s People, Process, and Parent pillars in the context of these expenses, we think this share class’ alpha relative to the category benchmark index will be materially negative, explaining its Morningstar Analyst Rating of Negative.