JPMorgan Core Plus Bond A ONIAX

JPMorgan Core Plus Bond comanager Steven Lear, who is also the U.S. CIO of the firm's global fixed-income currency and commodities platform, will retire in March 2024. Research veteran Kay Herr has joined the strategy as a comanager and will succeed Lear as the head of U.S. fixed income in October 2023 and leave her post as head of credit research for global fixed-income currency and commodities. Herr joined J.P. Morgan in 1999 as a research analyst. This does not change Morningstar's ratings on this strategy led by Andrew Norelli, who draws on a deep team of experienced comanagers.

JPMorgan Core Plus brings to bear the best of the firm's global fixed-income resources with its seasoned portfolio managers and collaborative process; its cheapest share class earns a Morningstar Analyst Rating of Silver, while its more expensive shares are rated Bronze and Neutral.

This strategy has long benefited from the thorough, bottom-up work of well-resourced and seasoned fundamental research analysts. Its management team also boasts considerable depth and experience. Lead managers Steve Lear (JPMorgan’s U.S. fixed-income CIO) and Andrew Norelli joined the strategy in 2013 and 2014, respectively, and make broad asset-allocation decisions based on the firm’s macroeconomic forecasts and input from three veteran sector-focused comanagers, each of whom represent specialist teams from the firm’s global fixed-income platform. Rick Figuly, named to the fund’s roster in 2006, manages the securitized sleeve, while Lisa Coleman and Tom Hauser each joined in July 2020 and oversee the investment-grade and high-yield credit sleeves, respectively. All five of these managers each bring over two decades of investing experience and long careers at the firm.

This strategy, which sits in the intermediate core-plus bond Morningstar Category, relies on off-benchmark stakes in high-yield credit and securitized sectors to differentiate it from the Bloomberg U.S. Aggregate Bond Index. The fund typically holds between 5% and 20% of assets in junk-rated corporates (the index features none, and many peers keep that exposure under 10%). Nonagency securitized debt makes up less than 2% of the index, but this team can invest up to 15% in commercial mortgage-backed securities, and up to 10% each in nonagency MBS and asset-backed securities; as of August 2022, the fund held 8% in high-yield and 25% in nonagency securitized bonds.

This combination of top-down and bottom-up sensibilities has paid off for investors. Since Norelli took the co-lead on the strategy in March 2014 through September 2022, its R6 share class’ 1.6% annualized return outpaced the benchmark’s 1.2% and its distinct intermediate core-plus peer median’s 1.3%. This top-quartile showing was even better on a risk-adjusted basis, as measured by Sharpe ratio, outpacing 84% of its rivals.

This collaborative process begins with JPMorgan’s quarterly investment meeting that sets macro themes for the subsequent three to six months while weekly sector meetings focus on relative value and tactical portfolio positioning. Steve Lear and Andrew Norelli synthesize these inputs to set the top-down positioning of the fund, namely the strategy’s directional risk profile, sector allocation, and yield-curve positioning. The sector-focused comanagers across investment-grade credit, high-yield, and securitized debt are responsible for bottom-up security selection within their respective sleeves, and their effectiveness is evaluated versus an internal benchmark. However, these value-driven lead managers can deviate from these benchmarks at times when they see attractive opportunities; for example, relative value in BBB rated corporates led the mangers to increase the fund’s stake to 15% in 2021 from 8% in 2020 despite the investment-grade corporate sleeve usually mirroring a higher-quality internal benchmark, the Bloomberg U.S. Corporate A3 or Better Index.

Over time, this strategy has packed more punch than the Aggregate Index, holding up to 30% in non-investment-grade bonds. Stakes of between 5% and 20% in junk-rated corporates, up to 15% in CMBS, and up to 10% each in nonagency MBS and ABS make up most of this allocation.

Dynamic use of off-benchmark sectors helps the managers actively adjust risk and gives this strategy a yield advantage over the Aggregate Index.

Amid more-attractive credit spreads, the fund’s 25% non-investment-grade allocation (including 9.5% in non-rated issues) as of August 2022 rose from 12% in 2019. High-yield corporates (8%) and nonagency MBS made up the largest stakes not included in its benchmark, and nonagency CMBS (11%) and ABS (7%) are prevalent compared with the benchmark’s 2% and 1%, respectively. U.S. Treasuries (28%) and agency MBS (21%) are the fund’s largest holdings but represent underweightings of 12 and 8 percentage points, respectively; within agency MBS, the managers avoid unfavorable convexity profiles of pass-throughs in favor of the more stable cash flows of collateralized mortgage obligations and CMBS. Amid the team’s caution around elevated default risk, its high yield stake fell to 8% as of August 2022 from 13% a year prior in favor of better fundamentals in nonagency MBS and CMBS.

Interest-rate strategies are not large drivers of relative returns, and the managers aim to keep duration (a measure of interest rate sensitivity) within plus or minus 10% of its index. However, they actively adjust curve positioning and employ Treasury futures to adjust the portfolio, as in 2020 when the team moved duration shorter than its index amid expectations for higher long-term yields. The fund’s 6.1-year duration as of August 2022 was slightly defensive versus its benchmark’s 6.4 years.

The managers here bring to bear the best of JPMorgan’s mix of top-down and bottom-up analysis, a testament to the firm’s globally integrated platform. Steve Lear (the firm’s U.S. fixed-income CIO) and Andrew Norelli joined the strategy in 2013 and 2014, respectively, and make broad asset-allocation decisions based on the firm’s macro forecast and sector specialists’ views. Three additional comanagers each represent a specialist team from JPMorgan’s Global Fixed Income, Commodities, and Currency platform. Rick Figuly, who manages the securitized sleeve, was named to the roster in 2006, while Lisa Coleman and Tom Hauser manage the investment-grade and high-yield credit sleeves, respectively, joined in July 2020. Despite the complexity of this setup, information sharing has usually been effective.

JPMorgan’s globally integrated team of over 70 fundamental and quant research analysts, led by Kay Herr, and over 30 dedicated traders across major fixed-income sectors support the managers here. This stable group has not had any recent turnover of any member directly involved in the strategy and added two experienced securitized credit analysts in 2021. Norelli and Lear share in the fund’s performance; each has personal investments exceeding $1 million.

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 Andrew Norelli's tenure from March 2014 through September 2022, the strategy’s R6 share class’ 1.6% annualized return outpaced the Aggregate Index’s 1.2% and its distinct intermediate core-plus category peer median’s 1.3%. This top-quartile showing was even better on a risk-adjusted basis(as measured by Sharpe ratio), outpacing 84% of its rivals.

A broad investment menu that includes off-benchmark high-yield credit and nonagency MBS and ABS allows the managers to nimbly rotate in and out of these sectors. Active management has resulted in consistent performance versus peers; it didn’t land among the best or worst across calendar years and typically held up better than peers in stress periods. For example, during the pandemic-driven downturn in March 2020, this fund’s 2.8% drop was less severe than its peer median’s 3.9% loss and held up better than 70% of its rivals. The managers then took advantage of bargains in investment-grade credit, increasing this position to 22% in mid-2020 from 18% at the beginning of the year. During the volatile year to date through September 2022, marked by inflation concerns and higher long-term yields, the strategy’s 10.3% loss was less pronounced than 73% of rivals thanks to its shorter-than-peer duration and higher allocation to securitized bonds that held up better than corporates.

The share class on this report levies a fee that ranks in its Morningstar category’s second-costliest quintile. That’s poor, but based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we still think this share class will be able to overcome its high fees and deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Bronze.