JPMorgan Income Builder I JNBSX

Collaborative contributors with access to well-resourced research and risk cohorts shrewdly position JPMorgan Income Builder to do what the strategy’s name suggests. That, coupled with greater stability across the leads on underlying portfolio sleeves, results in an upgrade of the Morningstar Analyst Rating for the Institutional and R6 shares to Silver from Bronze and an upgrade of the A shares to Bronze from Neutral. The C shares remains Neutral.

Two members of the portfolio management roster--Michael Schoenhaut and Jeff Geller--have been here since the strategy’s mid-2007 inception. Geller also serves as CIO of the firm’s multi-asset group, while Schoenhaut is in charge of the strategy’s day-to-day management alongside Eric Bernbaum, who was named here in late 2014. Gary Herbert, who joined as the firm’s head of U.S. global tactical allocation in early 2020, was appointed here in early 2021. Though Schoenhaut and Bernbaum are responsible for the dynamic asset allocation, they delegate managing the underlying sleeves (22 as of December 2021) to seasoned experts from across the firm’s many specialized investment cohorts. In 2018 and 2019, changes to the named leads on those sleeves gave pause, but turnover has since calmed and underpins an upgrade of the People rating here to Above Average.

This is a highly flexible mandate. Up to 100% of the portfolio may be fixed income, though below-investment-grade debt won’t exceed 70%. Equities may reach 60%, and the team may hold up to 25% in a combination of convertible and preferred securities. There are no limits to regional exposures. Mainstay sleeves include developed-markets equity (U.S. and international), U.S. high yield, and emerging-markets debt and equity.

In eight of the 10 calendar years prior to 2022, this strategy’s Institutional shares outperformed its typical peer in the allocation - 30% to 50% equity Morningstar Category, though it bested its Morningstar US Moderately Conservative Target Allocation Index benchmark in only four of those years. This is an income-focused offering, and relative to peers, the portfolio can court more volatility in pursuit of that aim, but for a patient investor willing to endure rough patches, longer-term prospects remain compelling.

The approach to this ever-evolving portfolio is thoughtful, disciplined, and risk-aware within the context of its income-generating mandate and continues to merit an Above Average Process rating.

Co-leads Michael Schoenhaut and Eric Bernbaum collaborate closely with experts from across the firm’s well-resourced asset-focused teams to surface compelling investment ideas and combine them into a risk-aware portfolio that will maintain capital and pay out income monthly. Though the duo is responsible for the dynamic asset allocation, they delegate (with regular check-ins and guidance) managing the underlying sleeves to experts that either lead investment cohorts within the firm or are seasoned contributors to those teams. Reviews of proprietary risk dashboards and discussions with risk specialists round out the process.

This is a very flexible mandate. Up to 100% of the portfolio may be fixed income, though below-investment-grade debt won’t exceed 70%. Equities may reach 60%, and the team may hold up to 25% in a combination of convertible and preferred securities. There are no limits to regional exposures, and up to 25% of foreign equity exposure can be in non-U.S. dollar currencies. The team employs this flexibility to maintain the portfolio’s yield (its 12-month yield has exceeded 3.4% since its 2007 inception), and over time, the number of underlying sleeves has increased. It reached 22 as of December 2021, following the addition of an equity premium income ETF (JPMorgan Equity Premium Income ETF JEPI) and a focused allocation to Asian high yield.

High yield bonds are one of the largest dedicated allocations here, and as of December 2021 these accounted for 27% of assets, on the lower end of its historical range since the strategy’s 2007 inception. But the team has been nimble, generally allocating more to high yield when the timing is right. Following the 2008 financial crisis, Michael Schoenhaut took advantage of battered prices and increased high yield to a peak of 54% in the first half of 2009, benefiting from the subsequent recovery in the asset class. Bank loans reached 4% of the portfolio as of late 2018 but were a modest 1% at the end of 2021. Nonagency securitized debt has ranged from 0% to 13.5% of the portfolio since inception and sat at 8.6% at the end of 2021. Higher-quality fixed-income exposures, such as agency securitized and investment-grade U.S. fixed income, have reached 7.3% and 10.2% of the portfolio, respectively, since its inception, but sat near 0% by 2021’s close.

Emerging markets (both debt and equity) contribute to the profile here; combined, they have occupied anywhere from 5.3% to 19.1% of the portfolio but sat at a modest 7.2% as of December 2021. Developed international equity exposure and U.S. equity exposure have reached highs of 25.1% and 17.0%, respectively, over the years, but clocked in at 13.2% and 11.6% by December 2021. Other noteworthy exposures at that point included 4% in global REITs, 2.5% in global infrastructure, and a sleeve dedicated to covered calls that reached 10% (it was 3% at the start of the year).

Seasoned portfolio managers up top with access to the firm’s expansive resources--which boast breadth and depth across sectors and risk types--provide an edge here. That, coupled with increased stability across the lineup of sleeve managers, instil confidence and supports an upgrade of the People Pillar rating to Above Average from Average.

The strategy’s quartet of portfolio managers are experienced and collaborative. Michael Schoenhaut, appointed here at the strategy’s mid-2007 inception, and Eric Bernbaum, who joined the roster in 2014, are the day-to-day leads and informally shape, manage, and monitor this offering. Jeff Geller, who also serves as the CIO of JPMorgan’s broader multi-asset group, joined the effort alongside Schoenhaut at inception. The most recent addition here is Gary Herbert, who came from Brandywine in early 2020, where he served as head of global credit. He now functions as the head of U.S. global tactical asset allocation and assumed a formal leadership role here in March 2021.

Schoenhaut and Bernbaum curate the portfolio overall, but asset-class experts helm the underlying sleeves. At the fund’s 2007 inception, there were five sleeves, but as the portfolio has diversified in its searches for risk-aware yield opportunities, that number has grown to 22, run by 20 individuals (one manager runs both a global equity and a global infrastructure sleeve and the broader multi-asset team owns the covered-call sleeve). In 2018 and 2019, an uptick in reconfigured sleeve leads gave pause, but that has since calmed.

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 targets income and will court greater risk than many peers in order to generate distributions. For a patient investor willing to endure bouts of market stress, over the long run, this remains a compelling option.

Since its June 2007 inception through February 2022, the Institutional shares generated a 5.7% annualized return that is higher than either the 5.5% return of its Morningstar US Moderately Conservative Target Allocation Index category benchmark or the 4.3% return of its typical peer in the allocation - 30% to 50% equity category. The strategy’s volatility over that same period is higher than those two comparative points, and the resulting risk-adjusted return (as measured by Sharpe ratio) modestly outsteps the typical category peer but trails the category benchmark.

Relative to the category, the profile here is more adventurous with junk bonds and emerging-markets exposures, characteristics that can fuel volatility during stressed markets. For example, the portfolio held 14.1% in emerging markets (6.6% in debt and 7.5% in equity) at the start of April 2018, more than double the exposure of its typical category peer. Over the subsequent five months, as emerging markets came under pressure, the strategy reduced its position, but the 1.5% return of its Institutional shares over that period trailed the 2.5% of its typical peer. And when 2020’s pandemic panic roiled markets (Feb. 20-March 23), those same shares lost 23.5%, more than the category benchmark’s 15.3% loss or its typical peer’s 20.4% 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 cheapest quintile. Based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Silver.