JPMorgan High Yield A OHYAX

JPMorgan High Yield’s experienced cohort is on the right path but needs more time under the current regime to execute its mandate. The strategy retains its Morningstar Analyst Rating of Neutral across all but its priciest share class, which is rated Negative.

Since late 2019, this team has undergone significant change, combining its independent legacy Cincinnati and Indianapolis teams into one cohesive unit. This integrated effort seems poised to leverage the vast experience and resources of this group led by JP Morgan’s global head of high yield Rob Cook. High-yield pros Thomas Hauser and Jeffrey Lovell join Cook and longtime manager Jim Shanahan, who has run this strategy since its 1998 inception. A robust fundamental credit analyst bench supports the managers. Relative stability over the past year is a positive sign after higher post-integration turnover brought about short-term uncertainty.

The disciplined process, which emphasizes fundamental analysis and security selection, remains the same under Cook’s leadership, but he brings a slightly different approach resulting in higher issuer concentration. While the process is solid on paper, a discernible advantage versus other high-yield bond Morningstar Category rivals has yet to emerge. Each credit analyst focuses their fundamental evaluation of issuers in their respective sector, and the managers synthesize these bottom-up recommendations with firm-generated liquidity and diversification risk reports to position the portfolio relative to the Bloomberg U.S. High Yield 2% Issuer Capped Index. This framework has allowed the managers to actively manage exposures, including stakes in leveraged loans and equity acquired through restructuring.

This flexibility hasn’t translated to noticeable outperformance relative to its distinct high-yield rivals. Cook’s tenure is short, and performance under his leadership mixed. A misstep in holding more cash during the mid-2020 high yield rally caused the strategy to significantly lag peers, but stronger relative performance more recently is positive. Over the trailing 10 years ended June 2022, the institutional share class posted a medianlike 3.9% annualized result.

This strategy’s process looks solid on paper but has yet to unveil a discernible competitive edge versus rivals under its new regime, supporting an Average Process rating.

Fundamental security analysis underpins this strategy’s disciplined process, and each sector-focused credit analyst digs deeply into their respective issuers. The managers leverage this input alongside firm-generated risk models around liquidity and sector diversification when positioning the portfolio relative to its Bloomberg U.S. High Yield 2% Issuer Capped Index. The focus on individual bond-picking, with emphasis on downside protection, results in a strategy with no duration or quality bias versus its index. The team favors lower-capital-intensity issuers with strong free cash flow. Historical industry over- and underweightings closely reflect the benchmark, but more recently, Rob Cook seems willing to take larger sector bets for higher-conviction trades.

Flexibility to invest outside high-yield debt gives this team options. They may allocate to senior secured bank loans (7.6% as of March 2022) and equities acquired via restructuring (3.5%); these positions often exceed those of its typical high-yield category rivals. In 2020, strong inflows led to a higher cash position; the underperformance resulting from this cash drag led the team to now allow high yield ETF investments to better manage cash deployment.

Rob Cook’s approach to portoflio construction leverages the same disciplined process, but higher issuer concentration results in larger sector differences versus its Bloomberg U.S. High Yield 2% Issuer Capped Index. The previous team’s sector allocations more closely resembled the benchmark, but Cook has increased these bets with certain over- and underweightings reaching 7%. For example, the strategy had a 6.8-percentage-point underweighting to financials and a 6.2-percentage-point overweighting to consumer noncyclicals as of March 2022.

The comanagers increased the allocation to senior secured bank loans to 8% from 3% as relative valuations favored loans. This increase over Cook’s tenure shows a willingness to use this bucket more tactically. Over the past year, duration, a measure of interest-rate risk, rose to 3.6 years, shorter than the index’s 4.4 years. The strategy’s defensive credit quality profile, with a slightly shorter spread duration, reflects the managers current cautious outlook.

Large inflows in mid-2020 and late 2021 caused elevated cash positions that exceeded 8%. The team struggled to deploy the 2020 inflow in a timely manner, which resulted in a significant drag on performance. Cook readily acknowledged this misstep and took measures to remedy the problem, adding the ability to invest cash into high-yield ETFs, if necessary.

JPMorgan’s overhaul of its high-yield franchise is now complete, and the pieces are in place for consistent success. But further monitoring of these seasoned portfolio managers and deep credit research team is appropriate, warranting an Average People Pillar rating.

The 2019 merger of JPMorgan’s legacy Cincinnati and Indianapolis high-yield teams into one cohesive unit is done. High-yield veteran Rob Cook leads this integrated effort as head of global high yield and lead portfolio manager for the strategy. Industry experience abounds here as comanagers Jim Shanahan (35 years), Thomas Hauser (28 years), and Jeffrey Lovell (27 years) collaborate with Cook (30 years) to guide this strategy. Cook strives to bring together the views and recommendations of portfolio managers, credit researchers, and traders to form investment decisions.

A 19-member Indianapolis-based dedicated high-yield analyst team boasts 16 years’ average experience, sensibly distributed along experience levels. The higher turnover in 2019 and 2020 has ebbed, and relative stability over the past year is a positive sign. However, seasoned credit researcher Bob Amenta recently announced his retirement; his sector coverage of autos, metals, and mining, packaging, and paper will be reallocated among the senior analysts.

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.

The current portfolio managers assumed responsibility of this strategy in earnest beginning in September 2019 and performance over this brief period is lackluster. Over their tenure through June 2022, the institutional share class’ 0.5% annualized loss slightly lagged its Bloomberg U.S. High Yield 2% Issuer Cap Index’s 0.2% loss and 57% of its distinct high-yield category rivals. This middling short-term performance continues a trend that precedes this new regime; the strategy’s 3.9% annualized result over the trailing 10 years ended June 2022 was only median, while its risk-adjusted performance, as measured by Sharpe ratio, lagged 60% of peers.

This strategy lagged peers in 2020 owing to a large cash drag from midyear inflows, which caused cash to exceed 8%. The team struggled to deploy that inflow in a timely manner, which resulted in a significant drag on performance. The strategy’s 3% calendar year return lagged 84% of category rivals. However, its 7.1% result in 2021 outpaced the median peer's 4.9%, fueled by restructurings of Hertz Global Holdings, Nieman Marcus, and various energy names. For the year to date through June 2022, the strategy is keeping pace with peers as high-yield markets posted double-digit losses amid higher inflation and greater economic uncertainty. The strategy’s 13% loss is better than 14.2% and 13.5% losses of the index and peers, respectively.

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 middle quintile. That’s not great, and 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.