JPMAM adds risk to its bond strategy

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Andrew Norelli, JP Morgan Asset Management

Traditional fixed income such as developed market government bonds have come under pressure amid high inflation, while some higher yielding quality corporate credit and emerging market debt present opportunities interesting, according to JP Morgan Asset Management (JPMAM)

“We remain generally positive on economic growth, so the sharp revision in market prices has given us the opportunity to add risk at cheaper levels and higher returns while remaining short-term,” he said. said Andrew Norelli, co-manager of the JPMorgan Income Fund. FSA.

Still, “most investors face the prospect of another year of negative real returns in 2022, or possibly longer. generate higher yielding income.

Norelli’s strategy has two main characteristics: first, it aims to earn attractive income given a “conservative level of risk and, it seeks an income profile similar to high yield credit but with lower volatility.

“This is achieved by obtaining income from sectors with low or negative correlations, resulting in lower portfolio volatility than individual sectors,” Norelli said.

Second, it tries to provide consistent dividends from a wide range of sectors, which it achieves in part by retaining coupon income during lean times.

Strategy performance

The $11.3 billion JP Morgan income fund generated a three-year cumulative return of 8.31%, outperforming its Bloomberg Barclays US Aggregate benchmark (3.33%) and the average return of global funds at fixed income available to retail investors in Singapore (1.27%). according to FE Fundinfo.

However, the strategy has been more volatile than both over the same period and suffered a particularly sharp drop in March 2020. Its annualized volatility is 7.24%, compared to 4.81% for its benchmark and 5 .55% for its peers, according to data from FE Fundinfo. .

JPMorgan Income Fund versus benchmark and industry average

Source: FE Fundinfo. Three-year cumulative returns in US dollars.

Nearly 90% of the portfolio is invested in North American bonds, and sector preferences include securitized debt (42%) and high yield credit (31%), according to the fund’s fact sheet (February 28, 2022 ).

The manager favors sectors with “well-supported fundamentals” and attractive carry, including high-yield corporate bonds, securitized credit and bank capital.

“The high yield credit market continues to look attractive going forward as growth remains robust and corporate earnings continue to show strength. Additionally, the level of distressed debt and high yield default remained historically low,” Norelli said.

Meanwhile, non-agency mortgage-backed securities (MBS) are supported by the strength of the U.S. housing market and the U.S. consumer, and he is positive about the momentum surrounding multi-family commercial MBS, where demographic trends to Longer terms are beneficial, and shorter lease terms allow properties to increase rents and cash flow in line with higher growth and inflation.

Norelli also sees opportunities in emerging markets, due to wider spreads and higher absolute returns, and he also likes Tier-1 capital instruments due to strong bank balance sheets.

Inflation risks

Norelli expects the US Federal Reserve to raise interest rates by at least 25 basis points at each of the next seven meetings, bringing the key rate to 1.75-2% by the end of the month. ‘year.

“In the near term, a commodity shock is occurring at a time when labor markets and manufacturing capacity are already stretched, global commodity inventories are low, and inflation is rising at a pace not seen since the early 1980s,” he said.

“A further significant acceleration in inflation that does not subside over the course of the year could cause central banks to be more aggressive in tightening monetary policy, thereby sacrificing economic growth in coming years and disrupting potentially the markets.”

His concern is that if the Federal Reserve hits 1.75%-2% over the next seven meetings and inflation remains an issue, it could begin the next leg of tightening at 3%-4%. “The markets are not prepared for this,” he said.

By using U.S. Treasury futures to manage its duration exposure, Norelli believes the strategy is able to execute its interest rate decisions independently of its sector allocation strategies, “highlighting the importance of a flexible and dynamic approach to duration management”.

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