JPMorgan Total Return R6 JMTIX

JPMorgan Total Return's flexible approach to this benchmark-aware core-plus mandate draws on this team’s unconstrained bond investing experience, but execution has not met expectations.

This lean investment team is led by fixed-income veteran Bill Eigen, whose history managing flexible mandates spans beyond his J.P. Morgan tenure that began in 2008. He draws on the support of longtime managers Jarred Sherman and Jeff Wheeler, who lead the fund’s investment-grade credit and securitized sleeves, respectively. A macro strategist, trader, and research analyst round out the group, and while the vast resources of J.P. Morgan's global fixed-income, currency, and commodities platform are at their disposal, they are only used sparingly. While this close-knit team collaborates on idea generation, Eigen has the final say on portfolio decisions, which introduces some key-person risk.

The framework combines the foundational attributes of traditional core bonds with opportunistic allocations. Three risk buckets serve to guide these exposures; core represents a traditional high-quality intermediate mandate, while opportunistic allocations range from high yield and structured mortgage-backed securities to relative value long-short strategies and other uncorrelated plays. While specific guardrails around these allocations are not defined, core makes up the lion's share of assets (about 91% as of September 2023). However, the fund's early days saw more than 30% of assets in opportunistic stakes, primarily high yield. Overall, void of compelling opportunities to invest in riskier sectors, the fund more closely resembles the risk profile of the Bloomberg U.S. Aggregate Bond Index.

This flexible approach fits with Eigen's contrarian style and desire to be nimble as market conditions change. However, his reluctance to enter riskier markets, even when spreads appear compelling, has caused the strategy's performance to lag core-plus rivals in recent years. High-yield corporate bonds, the fund's biggest risk lever, stood near its all-time low at 1.9% of assets as of September 2023. The fund continues to eschew risk and favor liquidity as investment-grade corporates, agency MBS, Treasuries, and cash made up more than 91% of assets.

This risk aversion has dented its long-term performance versus peers that held higher stakes in riskier debt. Over the past 10 years, the I shares' 1.8% annualized return ended December 2023 trailed its unique intermediate core-plus bond Morningstar Category median peer's 2.1%, ranking in the bottom quintile. Relative returns over the past three- and five-year periods were similar.

Noted contrarian Bill Eigen combines the foundational attributes of traditional core bonds with opportunistic allocations. The process segregates allocations into three risk buckets: 1) core, which serves as the traditional high-quality intermediate bond allocation, 2) extended sectors, which include long positions like high yield and structured credit, and 3) alternatives, which include uncorrelated trades like relative value (long-short) plays or in niche markets.

Guidelines around these specific buckets are fluid and can indicate Eigen's prevailing stance on risk. In the fund's early days, it had more than 30% of assets in the opportunistic allocation (extended and alternatives), while this stake was less than 10% as of September 2023, where it has remained for the past three years. Void of compelling opportunities to invest in riskier sectors, the fund more closely resembles the risk profile of the Bloomberg U.S. Aggregate Bond Index. In periods of elevated volatility, the team is able to invest generously in these opportunistic areas, buying when others are selling, though in practice it hasn't made as much use of this leeway as one could expect. The fund generally shies away from Treasuries in favor of higher-yielding bonds and has dabbled in niche markets, including credit risk transfer securities, insurance-linked bonds, and credit derivatives like CDX or ABX. Eigen's view is that predicting rates is challenging, so duration generally stays near that of the index.

Manager Bill Eigen can pull more levers than most peers, but he has exhibited more caution toward these more adventurous fixed-income sectors in recent years.

High-yield corporate bonds, the fund's biggest risk lever and largest historical driver of excess returns, have been a mere footnote in recent years. This stake, which stood near its all-time low at 1.9% of assets in September 2023, hasn't been meaningful since it made up about 13% in 2018, and down from its high of about 25% in 2015. At the same time, peers have broadly held more in sub-investment-grade paper than this strategy; the average core-plus peer's 11.8% of assets in below-investment-grade fare was higher than this fund's 5.8%.

Eigen isn't swayed by the market's consensus views and is open to risk when it presents an attractive opportunity. Even amid seemingly compelling high-yield valuations in 2020, he opted to add to investment-grade credit instead of junk-rated paper amid caution around corporate fundamentals. This investment-grade corporate stake stood at 43% of assets, down 6 percentage points from a year prior and nearly 13.5 percentage points from mid-2021. For a fund that tends to shy away from low-yielding Treasuries, this allocation rose to 14.7% of assets as of September 2023 from about 10% a year before, in addition to higher cash stakes. Agency MBS, mostly in pass-throughs, made up about 26.8% of the fund's assets. Duration, a measure of interest-rate risk, has moved roughly in tandem with the index; the fund's 5.7-year duration was slightly shorter than the year prior and nearly a half year short of the index's 6.2 years.

Eigen brought his opportunistic fixed-income style and pedigree in managing benchmark-agnostic mandates to J.P. Morgan in 2008 when he helped launch the nontraditional bond fund JPMorgan Strategic Income Opportunities JSOSX. Eigen previously led Highbridge Capital Management's fixed-income group and spent 12 years at Fidelity Investments, where he comanaged several multisector portfolios. He remains the head of the six-person, Boston-based absolute return and opportunistic fixed-income team.

This team sits outside of J.P. Morgan's larger global fixed-income, currency, and commodities, or GFICC, platform and features two supporting managers, a macro strategist, one assistant trader, and one research analyst. Managers Jarred Sherman and Jeff Wheeler are also key decision-makers; they are not named on this fund but comanage its flagship JPMorgan Strategic Income Opportunities. Sherman, an investment-grade credit specialist, brings over 24 years of experience, while Wheeler, who has over 26 years' experience, is responsible for the securitized assets selection. Moreover, while this team can draw on GFICC's resources, it does so only sparingly, mainly drawing on its Indianapolis-based high-yield team.

This small, close-knit group's process is less formal than those of larger managers, and while each member of the team helps to foster and vet ideas, final decisions fall to Eigen. Team stability over the past few years is encouraging after higher turnover between 2017 and 2019, although a research associate left in 2022. Moreover, Eigen's strong personality and final decision-making authority introduce some key-person risk here.

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' 1.8% annualized return ended December 2023 trailed its unique intermediate core-plus bond category median peer's 2.1%, ranking in the bottom quintile. And while it kept pace with its Bloomberg U.S. Aggregate Bond Index, investors should expect more given the fund's broad toolkit.

Bill Eigen's cautious view toward risk has hurt this fund that strives to deliver excess returns with lower-than-index volatility. Reluctance to add meaningfully to high-yield credit when spreads were especially wide has held it back and benefited peers that kept or added to these edgier companies. At the same time, the fund's overall volatility, as measured by standard deviation, was not meaningfully lower than peers despite the fund's tamer profile. Its 10-year standard deviation was slightly less than its median rival's, but its Sharpe ratio, a measure of return relative to volatility, was among the category's worst.

The fund's longer-term bias to spread products like corporate bonds and agency MBS over much of its life boosted returns during earlier risk-friendly periods, but the team has missed some recent opportunities. After 2020's coronavirus pandemic-driven high-yield selloff, Eigen's caution around corporate fundamentals led to higher stakes in investment-grade bonds rather than high yield as spreads blew out to multiyear wides. Last year was more of the same; the fund's yield underweighting versus peers caused its 5.4% gain to lag its typical core-plus rival's 6.4% return in 2023.

Based on our assessment of the fund’s People, Process, and Parent Pillars in the context of these expenses, we don’t think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Medalist Rating of Neutral.