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JPMorgan Income Builder A JNBAX

Analyst rating as of

Morningstar’s Analysis

Analyst rating as of .

Not for the faint of heart.

Our analysts assign Neutral ratings to strategies they’re not confident will outperform a relevant index, or most peers, over a market cycle.

Not for the faint of heart.

Senior Analyst

Summary

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JPMorgan Income Builder assumes unique risks to meet its aim of generating income, but lead manager Michael Schoenhaut is more than up to the task. His battle-hardened process, honed since this series' founding in 2007, carries this its two cheapest share classes to a Morningstar Analyst Rating of Bronze, while its two pricier share classes remain at Neutral.

Meaningful allocation moves contribute to this fund's distinctive profile. Schoenhaut and comanager Eric Bernbaum will dial exposures up or down by more than 10 percentage points based on a highly institutionalized process developed at J.P. Morgan. To generate income, high-yield bonds have at times climbed to 50% of assets, so this fund behaves quite differently from the allocation--30 to 50% equity Morningstar Category and the Morningstar Moderately Conservative Target Risk category index. The fund also dabbles in higher-octane, less-traditional fare, like convertibles and bank loans, to boost yield.

Management taps many separate teams from across J.P. Morgan to run tailored mandates that seek securities that fit the team's yield and risk profiles. Portfolio manager turnover at this level has been high recently: Six have departed in the past four years. These disruptions strain Schoenhaut and Bernbaum’s resources, because they are responsible for hedging out underlying sector bets that don't align with their views. Encouragingly, the pair received a fresh infusion of support in from Gary Herbert, a recent addition to J.P. Morgan from Brandywine who was named to the portfolio roster in March 2021.

Supported by a historical record of deft positioning, this well-equipped team manages the risks of this fund’s flexible process with discipline. Over his tenure from June 2007 through February 2021, Schoenhaut delivered on the fund’s objective to keep volatility below that of a custom 60% MSCI World Index/40% Bloomberg Barclays U.S. Aggregate Bond Index benchmark. As a result, the fund's I share class sports risk-adjusted results that match its custom benchmark. The fund has also consistently averaged more than 4% in yield over that time.

Process

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Lead manager Michael Schoenhaut balances opportunities in income with calibrated risk-taking. A seasoned asset allocator, Schoenhaut's involvement mitigates some of the security selection drag spurred by turnover at the underlying sleeves. The strategy earns an Above Average Process rating.

JPMorgan Income Builder has no dedicated strategic allocations. Instead, Schoenhaut and comanager Eric Bernbaum have wide latitude to identify relative yield opportunities based on tactical signals refined by J.P. Morgan, which have added value in 15 of the past 21 years. An income focus layers in risks that cause results to look markedly different from the fund's allocation--30 to 50% equity category, but the team remains risk vigilant by considering all yield opportunities on a risk-adjusted basis.

Recently, security selection misfires have hampered this fund's returns in sleeves with manager turnover. In European equities, for example, the team's sleeve lost nearly 30% in 2020 largely because of poor stock picks in financial services, while the MSCI Europe Index gained 5.4%. The manager overseeing that sleeve has only been in place since 2018. Still, Schoenhaut and Bernbaum step in to hedge out undesired exposures where needed, signaling that despite bouts of underperformance in underlying sleeves, this thoughtfully constructed strategy is more effective as a whole than the sum of its parts.

People

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Lead manager Michael Schoenhaut has adeptly steered this fund since its inception in 2007, but manager departures from the fund's underlying sleeves still sap resources and complicate curating this intricate strategy up top, a situation that justifies a People rating of Average.

Six of the strategy's 17 sleeves have weathered manager changes in the past four years. J.P. Morgan's analyst bench is responsible for security selection and provides some continuity, but often these managers run concentrated strategies to meet the lead managers' risk-conscious, yield-generating profile. These strategies may be difficult to replicate. In some cases, Schoenhaut and comanager Eric Bernbaum have stepped in to hedge out undesired exposures up top, and the pair has crafted strategic beta exposure in asset classes with manager changes, like in high yield and global equities.

J.P. Morgan recently provisioned the portfolio management team with a fresh pair of hands. In March 2021, the firm named Gary Herbert as a comanager on this strategy. Herbert joined the multi-asset organization a year prior from Brandywine Global Investors, where he specialized in global credit and multisector strategies. Herbert's promotion follows the departure of Matthew Pallai, this fund's named fixed-income specialist for less than a year before he left the firm in March 2020.

Parent

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J.P. Morgan Asset Management’s strong investment culture, which shows through its long-tenured, well-aligned portfolio managers and deep analytical resources, supports a renewed Above Average Parent rating.

Across asset classes and regions, the firm's diverse lineup features many Morningstar Medalists, such as its highly regarded U.S. equity income strategy that’s available globally. There's been some turnover in the multi-asset team recently, but it remains deeply resourced and experienced. Manager retention and tenure rates, and degree of alignment for U.S. mutual funds compare favorably among the competition. Managers' compensation emphasizes fund ownership over stock ownership, which is distinctive for a public company.

The firm continues to streamline its lineup and integrate its resources further. For instance, in late 2019, the multi-asset solutions division combined with the passive capabilities. The firm hasn’t launched trendy offerings as it’s mostly expanded its passive business lately, but acquisition-related redundancies and more hazardous launches in the past weigh on its success ratio, which measures the percentage of funds that have both survived and outperformed peers. Fees are regularly reviewed downward globally; they're relatively cheaper in the U.S. than abroad. Also, the firm is building its ESG capabilities and supports distinctive initiatives on diversity.

Price

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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 second-cheapest quintile. Even so, based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we don’t think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Neutral.

Performance

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The strategy's preference for income courts far more risk than its category index and allocation--30 to 50% equity category average. True, since JPMorgan Income Builder's June 2007 inception through February 2021, total annualized returns of 5.8% surpassed the 5.6% and 4.4%, respectively, of those benchmarks. However, the fund carried those results with higher volatility than its typical peer, resulting in a Sharpe ratio that sat near the category average and lagged that of the category index.

The strategy's bold profile can result in drawdowns that are hard to stomach. During the pandemic market panic of 2020's first quarter, this fund's I share class lost 20.5% and landed in the worst quintile of its category. Prior to the sell-off, the fund was hurt by its mistimed bet against equities that left it on the sidelines for much of 2019's gains. In the long run, we expect the series to capture enough market upside to recoup these losses, as it did in 2009 after the global financial crisis when the strategy placed in its category's top decile. Through its ups and downs over the past five years, the fund consistently generated an average of 1.9 percentage points more yield than its allocation--30 to 50% equity category, though it's notable to point out that the yield over that period steadily fell (from a peak of 4.75% in March 2020 to 3.4% as of February 2021) as income returns fell.

Portfolio

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An income focus shapes this fund's makeup. The team leans on lower-quality credit to generate yield, so as of February 2021, the team allocated nearly 32% to high-yield bonds, 25 percentage points more than the typical peer. The fund's equity exposure hews closely to its allocation--30 to 50% equity category average, but low-quality credit has a high correlation to equities and may inflict steep losses during drawdowns. Given their preference for credit, the managers prudently keep a light duration profile, with an average effective duration that's been 1.4 years shorter than the category average since inception.

The managers have a truly global outlook on equities, but their fixed-income strategies rely on American bonds, which may not be as compelling for global investors. Management currently allocates 8 percentage points more to non-U.S. equities than the category norm, but only 6% in total to non-U.S. bonds. U.S. securities absorb 85% of the high-yield portfolio, and a 9% allocation to U.S.-based securitized bonds further contributes to that home bias.

Like other income funds, JPMorgan Income Builder often delves into nontraditional fare like infrastructure and bank loans, but we remain confident in the team's ability to navigate the risks of esoteric exposures, even as it initiated an equity-linked notes sleeve in March 2020 to write calls on equity markets and repackage those returns into income.