JPMAM reduces risk in mixed-asset strategy

Asset Class in Focus

Despite the recovery in equity markets this year, JP Morgan’s flagship global income fund allocations reflect an environment of slowing earnings growth and rising macroeconomic risks.

Eric Bernbaum, JP Morgan Asset Management

“Mixing higher yielding and higher quality assets along with some dry powder to be ready to take advantage of dislocations in the markets is a prudent combination, as is looking globally and flexibly for the best sources of risk-adjusted income,” Eric Bernbaum, co-manager of the $29.2bn JP Morgan Global Income Fund told FSA.

Income is the fund’s first priority and beta exposure to a number of asset classes is necessary in order to meet this aim. The fund’s income yield at the end of February was 4.53%, according to Bernbaum.

“Core to our search for income are asset classes such as high yield bonds, emerging market debt, investment grade bonds, high dividend yielding global equities and global Reits,” he said.

At the end of February, the fund was 27% weighted to equities (including Reits). Fixed income gets a 54% allocation, which includes 34% in high yield bonds and had a 11% allocation to hybrids, including convertibles and preference shares.

“As we move through the late stage of the economic cycle, we have continued to look for assets that can provide alternative sources of yield and diversification” said Bernbaum.

He pointed out that the European high yield market has a higher credit quality profile and shorter duration than its US counterpart, while AAA agency mortgages provide an alternative to traditional government bonds and deliver an additional source of diversification and yield for the portfolio.

Equity rebound

“Equity markets experienced a welcome respite in January and February, after a torrid end to 2018,” he said.

He believes the 2019 rebound was entirely driven by investors re-rating market valuations, accepting higher stock prices. Yet as stock markets moved higher, earnings revision ratios continued to fall, he said.

But he believes forward US earnings on average will not meet market expectations.

“In our view, a stock rally from here would require upside surprises on earnings. We are comfortable with the current equity levels within our multi-asset income strategies and prefer to increase risk appetite across [interest rate] carry assets,” Bernbaum said.

Even as recession risk ebbs compared with the turn of the year, the US economy is still more prone to adverse shocks than it was in earlier parts of its expansion, argues Bernbaum.

“Inflation has also re-emerged as a notable macro risk, and volatility in the market pricing of inflation is a particularly dangerous risk for balanced portfolios, given that it tends to drive positive correlation between stock and bond returns,” he said.

Consequently, the fund raised its liquidity profile in January by adding an allocation to short duration fixed income, which included money market funds and short-term commercial paper, certificate of deposit, corporate bonds and asset-backed securities.


JP Morgan Global Income Fund vs mixed asset balanced sector

Source: FE Analytics. Three-year cumulative performance in US dollars.

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