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JPMorgan Core Bond C OBOCX

Analyst rating as of

Morningstar’s Analysis

Analyst rating as of .

A stalwart core bond option with a securitized focus.

Our analysts assign Neutral ratings to strategies they’re not confident will outperform a relevant index, or most peers, over a market cycle.

A stalwart core bond option with a securitized focus.

Senior Analyst

Summary

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JPMorgan Core Bond brings it home with a seasoned team and sensible process. Its cheapest share classes earn a Morningstar Analyst Rating of Silver while its more expensive receive Bronze or Neutral.

Portfolio manager Rick Figuly, a multidecade firm veteran and head of JPMorgan’s core bond team, leads this effort with the support of manager Justin Rucker and under the oversight of fixed income CIO Steve Lear. Figuly and Rucker work alongside a broader group of seasoned portfolio managers who have, in some cases, spent decades working together in Columbus, Ohio, and have built up a strong record of selecting attractively valued securities that generate strong cash flows. Their supporting credit research, trading, and operational resources, based across the United States and beyond, are robust and becoming more closely integrated.

Rather than take on significant interest-rate or credit risk (the managers keep the strategy’s duration within 10% of the Bloomberg Barclays U.S. Aggregate Bond Index and only purchase investment-grade fare), the team seeks to outperform its intermediate core bond Morningstar Category rivals by focusing on sensible sector rotation and security selection. Functionally, this has led the managers historically to emphasize securitized fare far more than its typical category rival or bogy. This allocation has included everything from plain-vanilla mortgage passthroughs to out-of-benchmark agency collateralized mortgage obligations, nonagency mortgages, and securitized credit. While the fund will also own investment-grade corporates, the team keeps below-investment-grade fare to a minimum.

The managers’ mortgage mantra means that the strategy will trail credit-focused peers when markets are on the upswing. Over the trailing 10 years ended March 2021, its institutional share class posted a middling 3.5% result. That said, its resiliency when these same markets have stuttered contributed to a significantly lower level of volatility (as measured by standard deviation) over the same period.

Process

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A thoughtful and repeatable approach guides this securitized-centric core bond offering, earning it an Above Average Process Pillar rating.

The team has a laser focus on the fundamental valuation of cash flows. A combination of proprietary models and the insight of seasoned sector specialists inform bottom-up analysis of each holding. The comanagers then sift through these recommendations and assemble a portfolio that considers relative value among sectors and attractively priced investment-grade bonds that the team expects to hold until maturity. The team minimizes interest-rate risk by keeping the strategy’s duration within 10% of their Bloomberg Barclays U.S. Aggregate Bond Index benchmark.

This method has led the managers to construct a strategy tilted more heavily toward mortgage-backed securities of various stripes than its bogy or typical intermediate core bond Morningstar Category rival. The portfolio historically has comprised 30% to 65% of assets in residential (both agency and nonagency) MBS, 15% to 40% in a combination of corporate and securitized credit, and 15% to 35% in U.S. Treasuries. While the team largely avoids taking on credit risk in high-yield fare (securities must be investment-grade at time of purchase), it will dip into esoteric, potentially volatile mortgage derivative structures at the margins where opportunities arise.

People

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This strategy draws upon the stronger elements of JPMorgan’s large fixed-income franchise, underpinning an Above Average People Pillar rating.

Rick Figuly, named the head of the firm’s core bond team in late 2019, serves as lead portfolio manager here. He, along with former comanager Barb Miller, joined this strategy in 2015 upon a long-tenured manager’s departure and remained in place after Miller stepped away to manage institutional affairs in late 2019. Figuly, joined by manager Justin Rucker in early 2019, has served at the firm for nearly 30 years and acts as a fulcrum for a broad group of portfolio managers, including seven unnamed managers tapped for this strategy, based in Columbus, Ohio. Figuly, Rucker, and their fellow buckeyes are seasoned collaborators, many sporting multiple decades working together in applying fundamental analysis and selecting compellingly priced cash flows (especially within securitized fare.)

Steve Lear, the firm’s U.S. fixed income CIO, joined the two as a manager here in early 2021 and underscores the firm’s focus on integrating its geographically widespread fixed-income resources. These are robust, including 17 investment-grade credit analysts, 18 high-yield credit analysts, six securitized analysts, and a host of additional rates and derivative specialists, traders, and risk-management professionals.

Parent

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J.P. Morgan Asset Management’s strong investment culture, which shows through its long-tenured, well-aligned portfolio managers and deep analytical resources, supports a renewed Above Average Parent rating.

Across asset classes and regions, the firm's diverse lineup features many Morningstar Medalists, such as its highly regarded U.S. equity income strategy that’s available globally. There's been some turnover in the multi-asset team recently, but it remains deeply resourced and experienced. Manager retention and tenure rates, and degree of alignment for U.S. mutual funds compare favorably among the competition. Managers' compensation emphasizes fund ownership over stock ownership, which is distinctive for a public company.

The firm continues to streamline its lineup and integrate its resources further. For instance, in late 2019, the multi-asset solutions division combined with the passive capabilities. The firm hasn’t launched trendy offerings as it’s mostly expanded its passive business lately, but acquisition-related redundancies and more hazardous launches in the past weigh on its success ratio, which measures the percentage of funds that have both survived and outperformed peers. Fees are regularly reviewed downward globally; they're relatively cheaper in the U.S. than abroad. Also, the firm is building its ESG capabilities and supports distinctive initiatives on diversity.

Price

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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 costliest quintile. Such high fees stack the odds heavily against investors. Based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we don’t think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Neutral.

Performance

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This strategy’s preference for higher-quality securitized fare over corporate credit has shaped its performance profile relative to its intermediate core bond Morningstar Category peers over the long term. Its institutional share class’ 3.5% annualized return over the 10 years ended March 2021 matched the result of its typical peer. That it achieved this result over a period largely that was supportive of corporate credit speaks to the team’s ability to select securities with stable cash flows, evidenced by the strategy’s lower level of volatility (measured by standard deviation) than its typical rival over the same period.

The strategy has shown itself to be a stalwart performer over credit sell-offs. When corporate markets sold off both during the commodity-related June 2015 through February 2016 credit drawdown and in the broad market fourth-quarter 2018 sell-off, this strategy posted a positive, top-quintile result in both cases. While stress in securitized markets weighed on results during the coronavirus-related market collapse between Feb. 20 through March 23, 2020, it still eked out a result stronger than 60% of its rivals. The strategy’s shorter duration bias has proved a boon in recent interest-rate shocks as well, and it landed ahead of 65% of its peers both in the first 10 months of 2018 and in the first quarter of 2021.

Portfolio

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The managers’ long-standing bias to securitized fare of all stripes held true over time, which makes this portfolio somewhat unique in its intermediate core bond Morningstar Category. For example, as of February 2021, this strategy’s 44% weighting was far heavier than its typical rival’s 30% stake. The largest weighting within this allocation went to agency passthroughs (13%); the managers concentrated on this allocation, including building a roughly 3% position in TBAs, as they believed they would receive the most support from Federal Reserve purchasing activity following March 2020. Multifamily commercial mortgage-backed securities (11%) and collateralized mortgage obligations (6%, including a less than 1% allocation to mortgage derivatives) rounded out the agency-backed holdings. Within nonagency mortgages (6%), the managers found compelling valuations in nonperforming loans (2%) due to their unique cash flow characteristics.

Outside of securitized, the managers significantly reduced their exposure to U.S. Treasuries (19% from 28% a year earlier) as a function of financing their purchasing activity in other sectors where they saw strong valuations in post-pandemic-related spread-widening. This included an increase in corporate credit exposure (32% from 23%), with the team maintaining its preference for banks and other financial institutions (10%) with strong balance sheets.