JPMorgan Core Plus Bond R6 JCPUX

Even with the addition of two relatively untested comanagers to the strategy's now six-person management team, JPMorgan Core Plus Bond remains a compelling offering because of the overall group's experience and the strategy's sound approach.

Albeit lacking in money management experience, CIO Kay Herr and rates specialist Priya Misra had considerable industry accomplishments when J.P. Morgan named them to the manager roster here in May 2023 and March 2024, respectively. Herr built J.P. Morgan's capable research teams and succeeded former lead Steve Lear, who retired in March 2024. Misra was head of global rates strategy at TD Securities before joining J.P. Morgan in 2023.

Herr and Misra are also surrounded by proven investment talent, starting with their four comanagers. Two-decade veteran Andrew Norelli, a comanager here since 2014, is working closely with Herr and Misra to drive portfolio decisions. Rick Figuly manages the securitized sleeve of the portfolio, while Lisa Coleman and Tom Hauser oversee the investment-grade and high-yield credit sleeves, respectively. The firm's large global fixed-income platform and its network of specialists help guide macro positioning and contribute to bottom-up ideas.

A robust, time-tested investment process that combines top-down views with diligent security selection animates the strategy, which comprises a mutual fund (its oldest version to which this report applies), JPMorgan Core Plus ETF JCPB, and a collective investment trust. J.P. Morgan's quarterly investment meeting sets macro themes while weekly sector meetings focus on relative value and tactical positioning. The lead managers synthesize these inputs to inform overall risk, duration and curve positioning, and sector allocation, and work closely with its sector-focused comanagers, who are responsible for bottom-up security selection.

The strategy balances its intermediate core bond characteristics with measured risk-taking in off-benchmark stakes. Various types of securitized debt feature prominently, typically 35% to 50% of assets. These aren't plain-vanilla pass-throughs; the team favors mortgage pools that meet its stringent standards that protect against prepayment risk and limit duration extension. High-yield credit is the largest non-investment-grade allocation, and the team adjusts these stakes to its outlook for risk. A cautious macro view has led the team to reduce high yield to about 10% of assets in mid-2024, about 3 percentage points less than two years ago, but recent economic optimism saw Treasuries fall to 24% of assets in June 2024, from 38% a year ago, in favor of investment-grade corporates and agency mortgage-backed securities.

The strategy's long-term results stand out. Since Norelli's March 2014 start, the R6 shares’ 2.6% annualized return through September 2024 beat the Bloomberg US Aggregate Bond Index's 1.9% and its distinct intermediate core-plus bond Morningstar Category peer median’s 2.3%. The fund's yield advantage and strong security selection helped the fund's trailing 12-month 9.5% return through September 2024 outpace more than two thirds of peers.

The three lead managers take macro cues to inform broad portfolio themes, while the sleeve managers drive bottom-up security selection. The strategy earns an Above Average Process rating.

J.P. Morgan's quarterly investment meeting sets macro themes for the subsequent three- to six-months while weekly sector meetings focus on relative value and tactical portfolio positioning. Kay Herr, Andrew Norelli, and Priya Misra synthesize these inputs to inform the portfolio's overall risk, duration and curve positioning, and sector allocation. They work closely with their sector-focused comanagers across investment-grade credit, high-yield, and securitized debt, who are responsible for bottom-up security selection. While these sleeve managers are measured against their respective internal benchmarks, there is a degree of flexibility to go off-script to reflect prevailing views and take advantage of attractive opportunities; for example, good relative valuations in BBB rated corporate bonds led the managers to increase this stake to 15% in 2021 from 8% in 2020, despite the investment-grade corporate sleeve’s higher-quality internal benchmark, the Bloomberg US Corporate A3 or Better Index.

The portfolio runs more credit risk than its Bloomberg US Aggregate Bond Index, holding up to 30% in non-investment-grade bonds. Junk-rated corporates, typically between 5% and 25% of assets, commercial mortgage-backed securities (up to 15%), and nonagency mortgage-backed securities and asset-backed securities (each up to 10%) make up most of this allocation. Overall interest-rate sensitivity as measured by duration stays in a tight band, typically within 10% of the index's.

Off-benchmark sectors and its value-driven approach help the team adjust risk and drive asset allocation.

Various securitized debt types feature prominently here, typically 35% to 50% of assets. Agency-backed MBS normally makes up about half of this stake, while nonagency MBS, CMBS, and ABS round out the allocation. By comparison, the Bloomberg US Aggregate Bond Index’s approximately 30% in securitized bonds is mostly plain-vanilla agency MBS pass-throughs. This team takes a different approach, focusing on specified MBS pools, call-protected CMBS, and ABS that meet their stringent standards and help protect against prepayment risk and duration extension.

Investment-grade bonds anchor the core of this portfolio, yet its off-benchmark stakes drive its risk profile. High-yield credit still makes up the largest allocation to non-investment-grade bonds, but the fund's 12.8% of assets there in late 2021 steadily fell to about 10% in June 2024. The team's cautious economic outlook in 2023 led the managers to increase its Treasuries stake to 38% of assets in mid-2023, about 20 percentage points higher than two years prior. However, amid a more positive outlook for risk in 2024, the managers favored more spread sectors, increasing agency MBS, ABS, and corporates; Treasuries exposure fell to about 24% in June 2024.

The managers make modest yield-curve adjustments. When 2022's inflation concerns caused yields to rise, the managers changed the portfolio's duration to 0.3 years shorter than its index in September 2022 from 0.1 years short six months prior. While this drove outperformance during the calendar year, the team's 2023 recessionary outlook meant reversing course. As such, duration lengthened to about 0.3 years longer than the benchmark but returned to neutral (6.1 years) as of June 2024.

Albeit lacking in money management experience, both Kay Herr and Priya Misa bring considerable industry accomplishments to their respective roles. Herr joined the roster in May 2023 to succeed US fixed-income CIO and portfolio manager Steve Lear, who retired in March 2024. Herr’s ascension to CIO in October 2023 reflects her success building J.P. Morgan’s fixed-income research teams and ability to lead a world-class bond shop. Misra has been in the industry for more than two decades and was head of global rates strategy at TD Securities before joining J.P. Morgan in 2023 and the fund's roster in March 2024.

The strategy's four other comanagers are seasoned bond specialists who draw on a robust supporting cast. Multisector bond veteran Andrew Norelli, who joined the strategy in March 2014, serves as a key decision-maker for the asset-allocation function. Rick Figuly manages the securitized sleeve (roughly 40% of assets) and has been on the fund since 2006. Lisa Coleman and Tom Hauser joined in July 2020 to oversee the investment-grade (20%) and high-yield credit sleeves (10%), respectively. This group doesn’t want for resources. Alongside the comanagers, the firm's large Global fixed-income, currency, and commodities platform and its network of fixed-income specialists help guide macro positioning and contribute to bottom-up ideas.

The managers' personal ownership aligns their interests with investors'. Herr and Norelli each invest at least $1 million in the strategy and Misra at least $200,000.

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.

Since Andrew Norelli’s March 2014 start, making him the longest-tenured nonsleeve manager, the mutual fund's R6 shares returned 2.6% annualized through September 2024 to beat the Bloomberg US Aggregate Bond Index's 1.9% and its distinct intermediate core-plus bond category peer median's 2.3%. This result landed ahead of two thirds of peers while its Sharpe ratio, a measure of excess return relative to excess standard deviation, was even better, outpacing more than 75% of rivals.

In line with its top-quartile Sharpe ratio, the strategy has demonstrated better downside protection than most peers in stress periods. During 2022's first quarter and the start of the Russia-Ukraine war, for example, the fund's 5.4% loss was less severe than its median peer's 5.8% drop; and at the beginning of 2020’s coronavirus-driven pandemic, its 2.8% loss was better than 70% of its rivals.

Amid inflation concerns and rising yields in 2022, the fund's shorter-than-index duration profile helped its calendar-year 12.7% loss hold up better than about 70% of peers. However, the managers' 2023 recessionary outlook and view that long-term yields would fall led them to increase interest-rate risk, and the portfolio’s longer-than-index duration kept its 6.3% gain for the year slightly below its median peer.

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 Silver.