JPMorgan High Yield A OHYAX

JPMorgan High Yield’s seasoned managers, deep credit analyst team, and considerable resources execute a prudent process, but middling performance has not distinguished it from peers.

Experienced managers and deep supporting resources rival that of the top high-yield competitors. J.P. Morgan tapped Rob Cook in September 2019 to lead this effort and build this stable team of high-yield specialists after the consolidation of the firm’s two legacy high-yield teams. He also rose to head the firm’s global high-yield platform. There is no shortage of experience with comanagers Jim Shanahan (38 years), Thomas Hauser (31 years), and Jeffrey Lovell (29 years) each having been at the firm for more than two decades. This close-knit team consolidates its various inputs in conjunction with its sizable credit research team and traders to inform investment decisions. As one of the deeper credit teams in the industry, its 18 dedicated high-yield researchers, plus three research associates, bring more than 17 years of average industry experience and feature a good balance of newer talent and veterans.

Strong fundamental credit analysis and effective collaboration are key to this approach. The managers work closely with each sector-focused researcher who dives deeply into their respective issuers to help build the portfolio. Regularly scheduled and impromptu meetings ensure ample inputs to discuss fund positioning, relative value opportunities, new issues, and individual credits. The managers leverage firm-generated risk models around liquidity and sector diversification when positioning the fund versus its ICE BofA US High Yield Constrained Index. The fund’s historical sector exposures have stayed within a tight band around the index’s weightings, but Cook’s tenure is marked by larger stakes in higher-conviction sectors like consumer noncyclical and communications, which have become strategic overweightings, while financials make up the fund’s largest underweighting. He is also willing to deviate more from the benchmark’s duration while the ability to invest in senior secured bank loans gives this team added flexibility.

These style tweaks have not led to better results yet, with only middling short- and long-term returns versus peers. Since Cook’s first full month of performance in October 2019, the fund’s 3.2% annualized return through May 2024 trailed the high-yield Morningstar Category median’s 3.4% gain and the ICE BofA US High Yield Constrained Index’s 3.5%. The fund’s volatility-adjusted results, as measured by Sharpe ratio, ranked near the category’s norm. While the past four calendar years’ results have been inconsistent, owing in large part to a challenging 2020, investors can expect a more predictable path forward.

Fundamental security analysis and strong collaboration among managers, analysts, and traders are key here. Credit selection remains the foundation of the strategy’s approach and each sector-focused credit analyst dives deeply into their respective issuers to bring forth their best ideas. Regular and impromptu meetings generate ample inputs to discuss broad fund positioning, relative value opportunities, new issues, and individual credits. The managers then leverage these inputs alongside firm-generated risk models around liquidity and sector diversification when positioning the portfolio relative to its current ICE BofA US High Yield Constrained Index, which replaced the previous benchmark, the Bloomberg US High Yield 2% Issuer Capped Index, on Jan. 1, 2023. While the indexes are substantially similar, the current benchmark, which excludes emerging-markets issues, better reflects the fund’s investment universe.

The emphasis on downside protection promotes diversification and favors lower capital-intensive issuers with strong free cash flow. Historical industry weightings closely reflected the benchmark, but Rob Cook’s willingness to take larger stakes in higher-conviction trades may cause sector and individual issuer exposures to drift from the benchmark going forward. The team has the flexibility to invest in senior secured bank loans, typically between 4% and 8% of assets, and smaller stakes in equities acquired via restructuring; these positions often exceed those of its typical high-yield rivals.

Lead manager Rob Cook’s aim for a beta-neutral fund versus its index means it will not take outsize credit risk relative to its benchmark. Instead, Cook and his comanagers rely on security selection to express more concentrated positions in higher conviction issuers and sectors. For example, before Cook assumed the lead in 2019, the fund’s historical sector allocations stayed within a relatively tight band around the index’s weightings; this new regime has deviated slightly from this playbook, taking larger stakes in higher-conviction sectors like consumer noncyclical and communications, which have become strategic biases and represent overweightings of 4.1 and 5.7 percentage points, respectively (as of March 2024). Citing competitive challenges and exposure to less reliable consumers, financials represents the fund’s largest underweighting: 7.9 percentage points less than the index’s weighting.

The team also allowed the portfolio’s duration to drift from its benchmark relative to history. However, this is less of an active interest-rate bet and more a function of security selection and relative value decisions. Since December 2019, when the fund’s duration was shorter than the index’s by about 0.2 year, the managers allowed duration to deviate by as much as 1.25 years shorter than the index at the end of 2021 and sits at about 0.6 year shorter as of March 2024.

Aside from high-yield bonds, the fund features senior secured bank loans to give the comanagers the flexibility to make relative value calls across these non-investment-grade sectors. This stake was near its 6% long-term average (as of March 2024).

When J.P. Morgan’s two legacy high-yield teams merged in September 2019, the firm tapped Rob Cook to lead this effort and build this stable team of dedicated high-yield specialists; he previously led J.P. Morgan’s Indianapolis-based high-yield team. Cook was named manager of the fund and chosen to lead the firm’s global high-yield platform. He is amply qualified, with more than three decades of industry experience, and has managed through multiple market cycles. There is no shortage of experience here with comanagers Jim Shanahan (38 years), Thomas Hauser (31 years), and Jeffrey Lovell (29 years), who collaborate with Cook and the sizable analyst team on portfolio decisions. They know each other well and have all been at J.P. Morgan for more than two decades. While Shanahan has been on the fund since 1998, Cook takes the lead here. This close-knit team consolidates its collective inputs, in conjunction with credit analysts and traders, to inform investment decisions, while Cook retains final decision-making authority.

An 18-member dedicated high-yield analyst team brings more than 17 years of average industry experience and features a thoughtful balance of early career and veteran researchers. Three generalist research associates and five traders add more depth. The team has dealt with a few unexpected departures over the past three years, but the key contributors to this strategy remain. Seasoned analyst Bob Amenta retired in May 2023; his sector coverage of autos, metals and mining, packaging, and paper was distributed among other senior analysts.

Fund ownership stands out. Cook and Lovell each own more than $1 million in the strategy, while the other two managers have at least $500,001, demonstrating strong alignment with investors.

J.P. Morgan is a well-resourced, diligent, and responsible steward of client assets. Investment teams are seasoned and stalwart, especially in equity and fixed income, the latter of which has successfully undergone substantial transformation in recent years. The firm offers competitive compensation that is aligned with fundholders and shows strong retention at senior levels of the organization. It demonstrates a culture of constant innovation and willingness to evolve. For example, J.P. Morgan recently expanded its investment committee process through which senior leaders review various teams and strategies, and it continues to develop proprietary portfolio management and risk oversight tools. Some funds still face high fee hurdles, but the firm has generally lowered expenses as it has grown.

The firm isn't without its complications. J.P. Morgan's product offering is extensive, and some areas need improvement. For instance, its multi-asset business has faced some challenges as a result of complex investment processes. The firm continues to build out its footprint in China, but its efforts there remain unproven. Although not every strategy is the best in its class, J.P. Morgan remains earnest in the pursuit of excellence, and investors are well-served.

The R6 shares’ trailing 10-year 3.6% annualized return through May 2024 was slightly worse than its unique high-yield category peer median’s 3.7%, with similarly ranked volatility-adjusted results as measured by Sharpe ratio.

Since lead manager Rob Cook took over in October 2019, he’s tried to improve the fund’s performance with more concentrated stakes in higher-conviction names; while there are signs of this, it has not led to better investor outcomes. Since Cook’s tenure, the fund’s 3.2% annualized return through May 2024 trailed its typical rival’s 3.4% gain and the ICE BofA US High Yield Constrained Index’s 3.5% return. The fund’s 3.0% return in 2020 lagged peers by about 2.5 percentage points, which hurt longer-term results; the team was slow to deploy a large cash inflow, causing this stake to exceed 10% and resulting in a significant cash-drag on performance. Don’t expect it to happen again, though; the fund can now use high-yield exchange-traded funds to ensure timely investments of cash. The fund made up some of this ground by beating the peer median by 2 percentage points in 2021.

In less dramatic market conditions, the fund’s measured approach usually caused it to perform in line with peers. In 2023, for example, the high-yield category’s calendar-year results were the best since 2019 after suffering a double-digit drawdown in 2022. The fund’s 12.1% gain lagged its typical peer’s 12.4% return and trailed its benchmark by more than a percentage point in 2023. Strong security selection in automotive names was not enough to offset its largest detractors in retail, wirelines, and aerospace/defense.

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.