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    1. Positioning a fixed income portfolio for rising rates? We share 3 pointers

    Positioning a fixed income portfolio for rising rates? We share 3 pointers

    Mar 2022 (3-minute read)

    J.P. Morgan Asset Management

    Important Information

    JPMorgan Funds – Income Fund
    1.  The Fund invests primarily in a portfolio of debt securities.
    2.  The Fund is therefore exposed to risks related to emerging markets, debt securities (including below investment grade/unrated investment, investment grade bond, credit, sovereign, interest rate and valuation risks), concentration, convertibles, currency, liquidity, derivative, hedging and distribution (no assurance on distribution or the frequency of distribution or distribution rate or dividend yield), class currency and currency hedged share classes risks. Pertaining to investments in below investment grade or unrated debt securities, these securities may be subject to higher liquidity risks and credit risks comparing with investment grade bonds, with an increased risk of loss of investment. Investments in asset backed securities and mortgage backed securities may be subject to greater credit, liquidity and interest rate risks compared to other debt securities such as government issued bonds and are often exposed to extension and prepayment risks. These securities may be highly illiquid and prone to substantial price volatility. Investment in RMB hedged share class is subject to risks associated with the RMB currency and currency hedged share classes risks. RMB is currently not freely convertible and RMB convertibility from offshore RMB (CNH) to onshore RMB (CNY) is a managed currency process subject to foreign exchange control policies of and restrictions imposed by the Chinese government. There can be no assurance that RMB will not be subject to devaluation at some point.
    3.  The Fund may at its discretion pay dividends out of capital. The Fund may also at its discretion pay dividends out of gross income while charging all or part of the Fund’s fees and expenses to the capital of the Fund, resulting in an increase in distributable amount for the payment of dividends and therefore, effectively paying dividends out of realised, unrealised capital gains or capital. Investors should note that, share classes of the Fund which pay dividends may distribute not only investment income, but also realised and unrealised capital gains or capital. Payment of dividends out of capital amounts to a return or withdrawal of part of an investor’s original investment or from any capital gains attributable to that original investment. Any dividend payments, irrespective of whether such payment is made up or effectively made up out of income, realised and unrealised capital gains or capital, may result in an immediate reduction of the net asset value per share. Also, a positive distribution yield does not imply a positive return on the total investment.
    4.  Investors may be subject to substantial losses.
    5.  Investors should not solely rely on this document to make any investment decision.

    Read More

    #ratehikes         #duration         #inflation

    Key takeaways:

    • The global fixed income market still presents compelling opportunities1 even as central banks are poised to raise rates to help combat rising inflation.

    • We consider these three points when positioning for interest rate hikes in an overall portfolio: seeking out higher-yielding bond assets, actively manage duration2 and diversifying across the full fixed income spectrum.

    Major central banks around the world are poised to raise interest rates to combat rising inflation, and such policy moves can erode real returns. Real return refers to what is earned on an investment after accounting for inflation, which can erode an overall portfolio’s purchasing power.

    To help manage an overall portfolio’s purchasing power against rising inflation, we share three pointers.

    #1: Seeking out higher-yielding bond assets

    • We expect most investors face the prospect of another year of negative real cash returns in 2022, or possibly longer. This means staying invested and seeking out assets that are likely to generate higher-yielding income have become more important.

    • Traditional fixed income such as developed market government bonds have come under pressure amid elevated inflation, while some quality higher-yielding corporate credit3 and select emerging market debt (EMD) are presenting compelling opportunities1.

    We believe the JPMorgan Funds – Income Fund’s current duration2 positioning and allocations to high-yield corporates3, the securitised market4 and select EMD look poised to capitalise on the continuation of a strong growth environment and high inflation in 2022.

     

    ACTIVE IN FIXED INCOME. SEEKING OPTIMAL INCOME OVER TIME

    Which is why J.P. Morgan's Income Strategy invests opportunistically across debt sectors globally for optimal income potential while actively managing duration and other risks over time as interest rates and markets change.

    Learn more

    income-fund

    #2: Actively managing duration2

    • In fixed income investing, duration is a gauge of interest rate risk, showing how bond prices and yields will likely change when rates move. Generally, longer duration bonds may suffer more price decline in response to a rise in interest rate.

    • Generally, duration positioning has served both as a risk management tool5 as well as a source of alpha. 

    The Fund has been building up short positions in US Treasury futures, enabling us to dynamically manage the Fund’s downside risks from rising interest rates by tactically hedging our interest rate exposure. This gives the investment team greater flexibility to express duration2 and sector allocation views independently of each other.

     

    JPMorgan Funds – Income Fund

    JPMorgan Multi Income Fund

    #3: Diversifying across the full fixed income spectrum

    • Different bonds react differently as market conditions change. Interest rate volatility has increased with yields of traditional fixed income coming under pressure. Non-traditional fixed income sources, however, are presenting compelling opportunities1 and potential for diversification.

    • For example, the fundamentals of asset-backed securities4 are supported by strong US consumer sentiment. Non-agency mortgage-backed securities (MBS) continue to be supported by the strength of both the US housing market and the US consumer. We also have a favourable view on the dynamics surrounding multi-family commercial MBS, where long-term demographic trends continue to support fundamentals for those properties, and shorter lease terms allow properties to increase rents and cash flows in accordance with higher growth and inflation.

    • Fundamentals within the high-yield credit3 market continue to look attractive on a go-forward basis as growth remains robust and corporate earnings continue to show strength. Additionally, the level of distressed debt and high-yield default have remained low.

    Sector breakdown of JPMorgan Funds – Income Fund

    Source: J.P. Morgan Asset Management, December 2021. The Fund is an actively managed portfolio; holdings, sector weights, allocations and leverage, as applicable are subject to change at the discretion of the Investment Manager without notice.

    Conclusion
     

    With an unconstraint investment approach, the Fund invests opportunistically across multiple debt markets and sectors without benchmark constraints, harnessing our top convictions as we seek attractive income opportunities1 while managing risk5 through diversification. We remain focused on allocating towards sectors where we continue to have a positive fundamental outlook and that, in our current view, continue to present attractive yield characteristics.

    Provided for information only based on market conditions as of date of publication, not to be construed as investment recommendation or advice.

    Diversification does not guarantee investment return and does not eliminate the risk of loss. Yield is not guaranteed. Positive yield does not imply positive return.

    1. For illustrative purposes only based on current market conditions, subject to change from time to time. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstance and market conditions.
    2. Duration is a measure of the sensitivity of the price (the value of the principal) of a fixed income investment to a change in interest rates and is expressed as number of years.
    3. High-yield credit refers to corporate bonds which are given ratings below investment grade and are deemed to have a higher risk of default. Yield is not guaranteed. Positive yield does not imply positive return.
    4. Securitisation is the process in which certain type of assets, such as mortgages or other types of loans, are pooled so that they can be repackaged into interest-bearing securities. Examples of securitised debt include asset-backed securities and mortgage-backed securities.
    5. The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.

    Investment involves risk. Not all investments are suitable for all investors. Past performance is not a reliable indicator of current and future results. Please refer to the offering document(s) for details, including the risk factors. Investors should consult professional advice before investing. Investments are not similar to or comparable with fixed deposits. The opinions and views expressed here are as of the date of this publication, which are subject to change and are not to be taken as or construed as investment advice. Estimates, assumptions and projections are provided for information only and may or may not come to pass. This document has not been reviewed by the SFC. Issued by JPMorgan Funds (Asia) Limited.

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