JPMorgan Global Bond Opportunities A GBOAX

JPMorgan’s Global Bond Opportunities strategy benefits from an experienced management team, the firm’s wider resources, and a flexible and nimble investment process.

Global fixed-income CIO Bob Michele and international fixed-income CIO Iain Stealey comanage the strategy, backed by a well-resourced and experienced team. In recognition of their contributions to idea generation and returns, four comanagers were added to the strategy in July 2020: Lisa Coleman, head of global investment-grade corporate credit, who joined in 2008; Andrew Headley, head of securitized strategies, who joined in 2005; Jeff Hutz, a high-yield portfolio manager who joined in 2004; and Diana Amoa, an emerging-markets portfolio manager who joined the team in 2015 but left in April 2021.

The strategy aims to maximize total return with a 5%-10% volatility target, which allows the team considerable flexibility to invest in a variety of sectors, such as high-yield and investment-grade corporates, emerging markets, and securitized debt. Macro decisions are the dominant driver of the process. The comanagers and sector team heads debate the macro environment at quarterly meetings, which define the team’s top-down investment roadmap. During the weekly sector team meetings, fundamental, quantitative, and technical research inputs are generated for every sector, which help fine-tune the asset allocation.

For most of the time since inception, the large stake in high-yield debt has ranged between 35% and 65%, across corporate credit, emerging-markets exposure (government bonds and corporates), and securitized and has been beneficial in a generally benign market environment. The team has exercised sound judgment in reducing that stake when valuations are less compelling, and it makes use of the flexibility and wider tools available. This gives confidence in the team’s ability to proactively reduce risk and modify exposure levels in market stress periods.

The strategy first became available to US retail investors in 2012 and then as a SICAV in 2013. Since their respective inception dates, all three vehicles (Luxembourg, UK OEIC, US) have outperformed their respective peers and Morningstar Category indexes on an absolute and risk-adjusted basis. In 2022 the strategy couldn’t avoid a negative return, but the outcome was better than with peers and handsomely ahead of the different vehicles’ respective indexes. Credit exposures including corporate investment-grade and high yield, as well as emerging-markets debt, detracted as spreads widened. However, net short government bond duration throughout the year, mainly via US Treasuries but also European government bonds, was the main driver of outperformance. A hedging position in Russian credit default swaps also helped at the beginning of 2022. In 2023 the strategy posted a positive return but underperformed peers owing to underweight exposure in riskier parts of the market such as high yield and emerging markets.

We rate the Process Pillar at Above Average.

The strategy is managed dynamically and has a global investment universe, including a wide range of fixed-income sectors, such as developed- and emerging-markets sovereign and corporate bonds, securitized debt, and currencies.

Macro decisions are the dominant driver of the process. The comanagers and sector team heads debate the macro environment at quarterly meetings, which define the team’s top-down investment roadmap. During the weekly sector team meetings, fundamental, quantitative, and technical research inputs are generated for every sector and are used in the weekly portfolio strategy meeting to fine-tune the asset allocation. This is driven by each sector’s expected return and conviction level. Sector teams play a vital role in credit selection.

The strategy’s broad guidelines include a 75% limit to high-yield exposure, a sector in which the strategy has exhibited a heavy bias historically, albeit more tempered of late. Duration can range from negative 2.0 to positive 8.0 years, but in practice it has never been negative.

As of February 2024, the strategy had a duration of 4.0 years, an increase from around 2.5 years a year prior. The increase in duration mainly came from the addition to exposure in emerging markets debt and securitized. The bulk of duration today comes from exposure to credit (2.8 years) and emerging markets (1.5 years), with 0.6 year coming from securitized. There is a negative duration of 0.8 year in government bonds as it holds short exposure to US government bonds as a hedge for duration risk in credit and emerging markets. The strategy also holds 0.4 years long exposure to European government bonds, specifically German Bunds and UK Gilts.

From an asset-allocation perspective, corporate credit accounts for 57.9% (higher from 52.6% a year ago), including 9.7% in non-US high-yield and 6.7% in US high-yield. Allocation to high yield was recently slightly increased by unwinding some index hedges. Within high yield there is a preference toward defensive sectors such as high-quality consumer-oriented companies, and select names within telecoms and media. The managers continued to favor investment-grade corporate credit with a roughly 38% allocation (similar to a year ago). Since last year allocations have shifted from high-quality credit to bank capital and corporate hybrids. The credit allocation also includes 4.0% in convertible bonds, most of which are US companies.

Exposure to emerging-markets debt stood at 17% (from around 16% a year prior) and included an 8.8% stake in local-currency debt, a 4.9% stake in hard-currency sovereigns, and 3.1% in corporate bonds. Securitized debt accounted for 12.5%—a material increase from 5% a year ago—and consisted of 9.9% in agency mortgage-backed securities (exposure was added when spreads reached historically wide levels last year due to selling pressure during the US regional banking crisis), 1.6% in commercial MBS, and small exposure in nonagency MBS, asset-backed securities, and collateralized loan obligations.

All figures above refer to the Luxembourg vehicle, but there are no material differences compared with the other vehicles.

The departure of Nicholas Gartside(previously international fixed-income CIO and comanager here) in 2019 didn’t cause disruption, as the presence of Michele and Stealey, both comanagers since inception, ensures continuity.

The managers primarily focus on top-down positioning; Michele focuses on US macro, while Stealey is more focused on the non-US side, mainly Europe. They rely on the expertise of sector specialist teams for idea generation and security selection across currency, rates, credit, securitized, and emerging-markets debt. Four comanagers were added to the strategy in July 2020 in recognition of their contributions to idea generation and returns: Lisa Coleman, head of global investment-grade corporate credit, who joined in 2008; Andrew Headley, head of securitized strategies, who joined in 2005; Jeff Hutz, a high-yield portfolio manager who joined in 2004; and Diana Amoa, an emerging-markets portfolio manager who joined the team in 2015. Amoa left in April 2021, but her departure did not cause any disruption given the team-based approach. Our conviction here is driven by the experience and portfolio management skills of the lead managers, the tenures of the comanagers, and the depth and quality of the available sector team resources. We maintain the People Pillar rating at Above Average.

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.

Although asset-allocation moves can be difficult to time, the team here has added value with its calls since inception. A large allocation to high yield has helped this fund thrive in previous credit market rallies, such as in 2013, 2016, 2017, and 2019. The decision to increase exposure in credit and emerging markets also helped during the market-recovery phase from the second to fourth quarter 2020, while the decision to increase high-yield allocation helped in 2021. At the same time, the strategy has held up relatively well during credit downturns thanks to the team’s preparedness to reduce risk. For example, the decision to have an underweight positioning in the energy sector from mid-2015 to early 2016 prevented the fund from getting hurt more than its average peer. In addition to that, the team has made other deft tactical moves to respond to quickly escalating risks. Examples include the first-quarter 2020 selloff caused by the outbreak of the coronavirus pandemic when government rates exposure in the US, Canada, and Australia; a reduction in high-yield positioning; shorts in emerging-markets currencies; and longs in safe-haven currencies all helped the fund hold up better than most peers. The year 2022 was another good example of a volatile period during which the strategy managed to contain downside volatility. While it couldn’t avoid a negative return, the outcome was better than against peers and handsomely ahead of the respective indexes for each vehicle of the strategy. Credit exposures including corporate investment-grade and high yield, as well as emerging-markets debt, detracted as spreads widened. However, net short government bond duration throughout the year, mainly via US Treasuries but also European government bonds, was the main driver of outperformance. A hedging position in Russian CDS also helped at the beginning of 2022. In 2023, the strategy posted a positive return with exposure to investment-grade corporates, high-yield corporates, and emerging-markets debt contributing to performance. However, it underperformed its peers owing to underweight exposure in riskier parts of the market, such as high yield and emerging markets, driven by the managers’ cautious macroeconomic outlook.

Based on our assessment of the fund’s People, Process, and Parent Pillars in the context of these expenses, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Medalist Rating of Bronze.