JPMorgan Global Bond Opportunities R6 GBONX

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

The Morningstar Analyst Rating for the fund’s cheapest R6 share class is upgraded to Silver from Bronze. Other share classes are rated between Bronze and Neutral, depending on fees.

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 light 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 maximise total return with a 5%-10% volatility target which allows the team considerable flexibility in investing in a variety of sectors, such as high-yield and investment-grade corporates, emerging markets, and securitised 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. This flexibility has seen the team exercise sound judgment in reducing that stake when valuations are less compelling, and make use of the wider tools available. This gives confidence in the team’s ability to proactively reduce risk and modify exposure levels in market stress periods.

From inception in 2012 through March 2022, the fund has outperformed its peers and category index in absolute and risk-adjusted terms. The strategy held up better than most during the most recent sharp credit selloffs. One example is early 2020 when the team cut its high-yield and emerging-markets exposure, increased duration, and added value with tactical currency trades. In first-quarter 2022 it outperformed as short exposure to government bonds and a hedging position in Russian CDS contributed.

While the approach here courts risk, the team’s allocation decisions have been generally effective, often allowing the strategy to participate in the upside for risk assets during benign markets, while proactive risk reduction has helped during periods of turmoil. We therefore score 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 between negative two to positive eight years, but in practice it has never been negative.

As of March 2022, the strategy had a duration of 2.1 years, reduced from 3.7 years a year prior as the managers expected interest rates to move higher. The bulk of duration today comes from exposure to credit (3.0 years) and emerging markets (1.6 years), with 0.2 years coming from securitized. The strategy has a negative duration of 2.8 years in government bonds as it holds 1.7 years short exposure to US Treasuries and 1.1 years short exposure to European government bonds (mainly Italy and France) as a hedge for duration risk in credit and emerging markets.

From an asset-allocation perspective, corporate credit accounts for 57.6% (from 47.7% a year ago), including 15.9% in US high yield and 10.4% in non-US high yield. The team increased high-yield exposure throughout 2021 as they deemed the strong economic backdrop and reopening of economies after the coronavirus pandemic as supportive factors. The managers continued to favour investment-grade corporate credit with a 26.2% allocation (up from 21% a year ago), focusing on quality firms and participating in the new issuance market. Exposure to emerging-markets debt stood at 16.9% (from around 21% a year prior), and included a 7.3% stake in local-currency debt, 5.9% stake in hard-currency sovereigns, and 3.7% in corporate bonds. Securitized debt accounted for 6.4%--a reduction from 11.2% a year ago as proceeds were used to increase high-yield allocation--and consisted of diversified exposure in mortgage-backed securities, asset-backed securities, covered bonds and CLOs.

The strategy is comanaged by global fixed-income CIO Bob Michele, who joined the firm in 2008 from Schroders, and international fixed-income CIO Iain Stealey, who joined in 2002. 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 does 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, as well as the depth and quality of the available sector team resources. We therefore upgrade the People Pillar rating to Above Average from Average.

A well-resourced, thoughtful, and disciplined steward of client assets, JPMorgan Asset Management maintains an Above Average Parent rating.

As of 2022, this investment stalwart manages more than USD 2.5 trillion in AUM. Composed of various cohorts globally and a diverse set of 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.

From the strategy’s inception in 2012 through March 2022, this fund has outperformed its multisector bond category peers and its category index on both a total return and risk-adjusted basis.

Although asset-allocation moves can be difficult to time, the team here has added value with their 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 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 owing to the team’s decision to reduce risk. For example, the decision to have an underweight positioning in the energy sector in mid-2015 to early 2016 prevented the fund from getting hurt more than its average peer. In addition to that, the team has made some deft tactical moves to respond to quickly escalating risks. An example here includes the first-quarter 2020 sell-off 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 helped the fund hold up better than most peers. In first-quarter 2022 short exposure to government bonds and a hedging position in Russian CDS helped the strategy containing downside volatility.

It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s cheapest quintile. Based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Silver.