JPMorgan International Hedged Equity continues to deliver on its promise of a low-volatility portfolio that can help investors stay the course during volatile markets. Consistent implementation by an experienced team and reasonable fees add to its strengths.
The strategy cushions downside loss by forgoing some upside returns. It layers MSCI EAFE Index options on top of an equity portfolio that closely hugs the index on a quarterly basis. To offer downside protection, the managers buy put options with strike prices 5% below the MSCI EAFE Index’s market value. They pay for part of that purchase with proceeds from selling put options 20% out of the money. This structure should generally protect the fund from quarterly losses between 5% and 20%. If markets fall less than 5%, the fund should closely track the MSCI EAFE Index. If the index falls more than 20%, the fund will begin participating in losses once again, maintaining a roughly 15-percentage-point advantage over the index in these quarters. To cover the remaining cost of the put purchase, the managers sell out-of-the-money call options, which limits the strategy’s upside. The call strike price moves dynamically with market conditions, averaging between 3.5% and 5.5% above the index value historically.
Hamilton Reiner runs the show here. The lead manager and architect of the strategy joined J.P. Morgan in 2009 and has more than three decades of equity and options trading experience. He is supported by comanager Piera Elisa Grassi and a deep bench of equity analysts who implement the low-tracking-error equity portfolio the options are built around.
Performance divergence can emerge between this fund and its S&P 500-based counterpart, as each overlay applies to a different index. Nonetheless, the same return pattern holds. As designed, the options overlay has effectively cut risk. The fund contained losses to only 5.3% in the second quarter of 2022 and outpaced the MSCI EAFE Index by over 9 percentage points. The strong downside protection comes at cost, but the fund still provides robust returns. From its 2019 inception through August 2024, the institutional share class returned 5% compared with the MSCI EAFE Index’s 7.9% return. This is a decent option for investors seeking to manage risk in global markets.