Portfolio Q&A: Income Fund
Flexibility is at the heart of our approach to fixed income markets.
Investors may face the prospect of another year of negative real cash returns in 2022, or possibly longer. This means staying invested and looking for assets that generate income will be important to ensure the overall portfolio’s purchasing power is not eroded by inflation.
Even as inflationary pressure is building up in certain regions, and some central banks are considering raising rates, we believe that any such moves are likely to be gradual.
As investors intensify the search for high-grade and high-yield1 allocation ideas2, it’s crucial to employ an unconstrained and flexible approach to differentiate and invest where opportunities can be found.
Market expectations** for policy rates
Source: J.P. Morgan Asset Management, Bloomberg. Data reflect most recently available as of 29.11.2021.
**Expectations are derived from the 3-month moving average of the overnight index swap (OIS) forward rates. Past performance is not a reliable indicator of current and future results . Forecasts, projections and other forward looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecast, projections or other forward statements, actual events, results or performance may differ materially from those reflected or contemplated.
Investing opportunistically across multiple debt markets and sectors without benchmark constraints, we harness our top convictions to capture attractive income opportunities while managing risk through diversification. Employing an unconstrained approach, we navigate dynamically across the fixed income spectrum as market conditions change.
A wide spectrum of fixed income sectors
Source: J.P. Morgan Asset Management. This information is provided for illustrative purposes only. Information shown is based upon market conditions at the time of the analysis and is subject to change. Not to be construed as investment recommendation.
Different bonds react differently as market conditions change. With flexible allocations across sectors and geographies, JPMorgan Funds – Income Fund seeks to minimise fluctuations in dividend payments of its monthly distribution share classes* under different market conditions. (*Aim at monthly distribution. Dividend rate is not guaranteed. Distributions may be paid from capital.Refer to important information 3)
In anticipation of rising rates, shorter duration holdings and high-yield1 credit are currently our high-conviction ideas2.
With a flexible strategy, the Fund invests opportunistically across different sectors to seek optimal income potential even as interest rates change.
Seeking yield across individual fixed income sectors
Source: Barclays, Bloomberg Finance L.P., FactSet, ICE BofA Merrill Lynch, J.P. Morgan Economic Research, J.P. Morgan Asset Management. Based on Bloomberg Barclays US Aggregate Credit – Corporate Investment Grade Index (US IG), Bloomberg Barclays Euro Aggregate Credit – Corporate (Europe IG), J.P. Morgan Asia Credit Investment Grade Index (Asia IG), Bloomberg Barclays Global Aggregate – Corporate (Global IG), Bloomberg Barclays US Aggregate Credit – Corporate High Yield Index (US HY), Bloomberg Barclays US Aggregate Securitised – Asset Backed Securities (US ABS), Bloomberg Barclays Pan European High Yield (Europe HY), J.P. Morgan Asia Credit High Yield Index (Asia HY), ICE BofA Global High Yield (Global HY), J.P. Morgan GBI-EM (Local EMD), J.P. Morgan EMBI Global (USD EMD), J.P. Morgan Asia Credit Index (JACI) (USD Asia Credit), J.P. Morgan Asia Credit China Index (USD China Offshore Credit). 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. Yields are not guaranteed, positive yield does not imply positive return. Past performance is not a reliable indicator of current and future results. Data reflect most recently available as of 30.09.2021.
What is duration?
In fixed income investing, duration is a gauge of interest rate risk, showing how bond prices and yields will likely change when interest rates move. Generally, longer duration bonds may suffer more price decline in response to a rise in interest rate.
Currently, inflationary pressure is building up in some economies including the US. The Federal Reserve has started to roll-back its stimulus measures in response, with rate hikes likely in 2022. This highlights the importance of a flexible and dynamic approach to duration management.
How we manage duration?
As the movement of interest rates can have significant impact on a fixed income portfolio, we strive to manage these risks6 by adjusting duration. As illustrated in the chart, we are building up short positions in US Treasury futures to manage the risk of rising yields.
With active duration management, the Fund can continue its pursuit of high-conviction ideas across the fixed income spectrum even as rates change.
Actively managing duration
Source: J.P. Morgan Asset Management. Data as of 31.10.2021. 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. 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.
Our research emcompasses fundamental, quantitative and technical analysis
Our risk management6 discipline is essential to our investment process