JPMorgan International Hedged Equity R6 JIHRX

JPMorgan International Hedged Equity offers investors a transparent well-defined strategy that will help them remain invested during challenging markets. Its experienced team and reasonable fees earn the strategy a Morningstar Analyst Rating of Silver for its cheapest share classes, while more-expensive share classes are rated Bronze and Neutral.

Like the U.S.-based JPMorgan Hedged Equity fund JHEQX, this strategy aims to provide smoother equity returns by tempering downside and upside returns via a systematically implemented options strategy. Every third Friday of the last month of each quarter, the team purchases MSCI EAFE Index put options 5% below the MSCI EAFE Index’s value. To offset the cost of the put option, the team first sells put options 20% out-of-the-money. This structure should generally protect the fund from quarterly losses in the 5%-20% range; if markets fall less than 5%, the fund should fall in line with the market, and if the market falls more than 20%, the fund should incur the same incremental losses beyond negative 5%. The team also sells call options to generate enough option premium income to cover the remaining cost of the hedges.

Hamilton Reiner runs the show here. The lead manager and architect of the strategy joined JPMorgan 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.

The international fund has not seen the same stratospheric growth in assets as its S&P 500-based counterpart. This likely owes to the fund’s shorter history, domestic market bias in some investor’s portfolios, and potentially the blemish on the international fund’s track record when its short put options leg expired in-the-money. Though the process is similar for the two strategies, each overlay applies to a different index, accounting for some performance divergence. However the same investment philosophy holds. For example, the fund’s Institutional shares have lost only 11.5% in 2022 through August compared with the MSCI EAFE's 21.7% decline. The strategy implements the same investment thesis and charges the same fees as the S&P focused fund, making it an interesting option for investors seeking to risk manage global markets.

This thoughtfully designed options trading strategy’s well-defined and disciplined process has produced consistent performance, leading to an Above Average Process rating.

The strategy aims to provide a smoother ride to equity investing by purchasing 5% out-of-the-money put options and selling 20% out-of-the-money put options over a non-U.S., international equity portfolio. This structure, called a put-spread, is designed to protect capital when markets sell off 5%-20% in a given three-month period but also has a lower cost compared with outright put protection. However, as the short option position is so far out-of-the-money, management also sells a call option to cover the price of the long put position. The call options are usually sold 3.5%-5.5% out-of-the-money, depending on the amount of income needed to cover the cost of the long put, but periods of heightened volatility can move that target higher. The level at which the call strikes are written will determine the strategy’s upside cap for the three-month period.

The team intends to generate a small level of alpha in the equity portfolio by being slightly overweight in attractively priced stocks and modestly underweight in expensive stocks based on fundamental analysis. As the constitution of the equity portfolio closely replicates the MSCI EAFE, the use of the index options is not problematic from a hedging perspective.

The strategy’s core long equity portfolio should track the MSCI EAFE index closely as it constrains tracking error to 1.5% annually. It aims to outperform that index by tweaking the individual stock exposure within a 1-percentage-point range using a dividend discount model that ranks stocks from most attractive to least attractive based on forecast earnings and company-specific growth catalysts. The team creates a well-diversified portfolio that mitigates risk associated with individual holdings, with the resulting portfolio holding around 200 stocks. Sector weightings resemble the S&P 500, with modest underweightings in communication services and healthcare and a small overweighting in financials.

As quarterly options are (currently) not available for the MSCI EAFE, the team constructs a zero-cost option overlay every third Friday of the last month of each quarter. Call premiums received should improve with persistently high market volatility and higher interest rates, thus improving the strategy’s upside in such a market environment. This was the case in much of 2020 (Hedged Equity's call options had a strike price closer to 7% out-of-the-money following a period of extremely high volatility) and parts of 2021. However, in periods of serious market stress (such as Black Monday in 1987, where the S&P 500 dropped 23% in a single day), the short out-of-the-money put leg of the spread may expose the fund to additional losses.

A small yet experienced management team that leverages JPMorgan’s deep resources earn this strategy an Above Average People rating.

The core team tasked with managing this strategy is small, but concerns about its size are mitigated by the options overlay’s systematic implementation and access to a strong support team. Lead portfolio manager and strategy architect Hamilton Reiner joined the firm in 2009 and now has three decades in the derivatives markets. Prior to joining JPMorgan, Reiner held senior positions across Wall Street at Barclays Capital, Lehman Brothers, and Deutsche Bank, and he spent the first 10 years of his career at O’Connor and Associates, an options specialist firm. Although he is the only dedicated investment resource dedicated to executing the options overlay, there is strong institutional framework at JPMorgan supporting the strategy.

Piera Elisa Grassi, Winnie Cheung, and Nicholas Farserotu are also named portfolio managers on the strategy and are responsible for the equity portfolio implementation. Grassi also runs JPMorgan’s Global and International Research Enhanced Index strategies, where she directs JPMorgan's deep bench of 14 equity analysts, who average 19 years of industry experience. Notably the managers of this variant don't invest much alongside shareholders (0-$10,000 across all four managers), whereas Reiner invests more than $1 million in the original Hedged Equity fund.

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 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.

The international fund has had a rougher ride than JPMorgan Hedged Equity thanks in part to market price path dependency, an inherent risk factor of the entire Hedged Equity suite of funds. This was apparent at the end of the first quarter of 2020, when the Institutional share class lost 13.4% when its short put options expired in-the-money. The U.S.-based Hedged Equity fund was afforded a few more days of the market recovery owing to its quarter-end expiry and its short put option expired worthless, causing the sibling fund to lose only 4.9% during the quarter. An outcome like this could easily reverse in the future and highlights how the Hedged Equity group of funds is subject to the outcome equity market.

The options overlay is designed to protect capital when the MSCI EAFE Index drops 5%-20% in a given three-month period. This means investors will be exposed to losses if the MSCI EAFE Index loses less than 5% in a three-month period, and additional incremental of greater than 20%. However, this hasn’t stopped the strategy from achieving its goal of lower volatility relative to the index. From April 2019 through August 2022, its 10.2% standard deviation clocked in lower than that of the MSCI EAFE Index's 17.8%. Moreover, the maximum drawdown (based on monthly data) was limited to negative 13.4% relative to the index’s negative 22.8%. Even so, JPMorgan has been able to capture more than 53% of the index’s upside returns.

Investors should note that the intraquarter experience will vary given that option pricing is dynamic until expiration. Options’ values are marked to market daily, which often results in intraquarter deviations from the quarter-end return.

The R6 class charges a low 0.35% per year