4 Core Bond Funds That Are Better Than They Look

Reprinted by permission of Morningstar, Sept. 5, 2017 ? PM325391

4 Core Bond Funds That Are Better Than They Look

Our Picks | 08-23-17 | by Karen Wallace

My colleague Miriam Sjoblom recently warned investors that they may be underestimating, or at least misunderstanding, the potential risks in their bond portfolios if they're assessing risk primarily using volatility-based metrics. The reason: These trailing measures are very time-period specific.

peers. But what if we see higher volatility during the next five years? Bond investors would do well to pay attention to potential risks that trailing volatility measures may not be highlighting--credit quality (or other fundamental measures of default risk), duration, and currency exposure, for example.

"Historical volatility is also only as helpful as the time period you choose and the specific events that occurred in it--which may not be similar to the risky events to come," Sjoblom said.

"Bond managers who have been willing to underperform lately, both in absolute and risk-adjusted terms, rather than follow the crowd into riskier territory, may be set up to succeed in the future," Sjoblom said.

Volatility has been scarce lately, she said. To illustrate, let's look at the high-yield bond Morningstar Category over two consecutive five-year periods--one beginning July 1, 2007 and ended June 30, 2012, and the other beginning July 1, 2012 and ended June 30, 2017. The high-yield category's annualized returns were very similar during these two stretches--at 5.5% and 5.6%, respectively. But the path they took to get there was markedly different: The category's standard deviation of returns during the first five-year period was 12.7, whereas the more recent period's standard deviation was only 4.8.

The Sharpe ratio, one measure of risk-adjusted return, looks at the excess return earned by a specific asset (i.e. how much it returns over and above what you could get from a riskless asset like a short-term Treasury) then divides that excess return by the asset's volatility as measured by standard deviation during the period. The goal of this exercise is to determine whether investors were sufficiently compensated for asset's risk (as measured by volatility) during the period. Because the high-yield category's standard deviation was so much higher during the 2007-2012 period, its Sharpe ratio during that period was only 0.42; it was a much better-looking 1.15 during the more recent trailing five-year period.

You can see how a bond fund with a large stake in lower-credit-quality bonds might look pretty solid on a risk-adjusted returns basis over the recent trailing five-year period compared with its higher-quality

With that as a springboard, I searched for some highly rated core bond funds that have underperformed lately owing to their conservative positioning, but which have strong fundamentals and disciplined approaches that would likely help them hold up well in a risk-off environment.

Fidelity Intermediate Bond (FTHRX) Relative to competitors in the intermediate-term bond Morningstar Category, Silver-rated Fidelity Intermediate Term Bond has a restrained risk profile. For starters, it tends to court less interest-rate risk; duration is currently 4 years compared with 5 years for typical fund in the category, said analyst Emory Zink. The fund tends to favor corporates, and though the portfolio includes a sizable stake in BBB rated bonds (22%), it limits its exposure to below-investment-grade to 5% and currently holds even less than that. When compared with peers that have a similarly short duration, the fund's returns are solid, and its relatively high 12-month yield combined with a low expense ratio gives the fund a boost in a universe where every basis point counts, Zink said.

Wells Fargo Core Bond (MNTRX) For investors in search of a more conservative intermediate-bond fund, this one deserves a look. Silver-rated Wells Fargo Core Bond doesn't make big interest-rate bets, keeping its duration and yield curve positioning in line with the Bloomberg Barclays U.S. Aggregate

Reprinted by permission of Morningstar, Sept. 5, 2017 ? PM325391

Bond Index. Furthermore, it invests only up to 5% in high yield, and it cannot invest in nondollar bonds or in futures, putting it on the more conservative side of the intermediate-term bond spectrum, explains senior analyst Maciej Kowara. There are markets where this fund will not shine: Its duration-neutral stance makes it vulnerable in rising-rate environments, and its low absolute and relative exposure to lowercredit-quality bonds will cause it to lag during high yield rallies. But for investors whose horizon is at least as long as the whole market cycle, Kowara believes the fund is one of the better options out there.

JPMorgan Core Bond (WOBDX) Though the team running Silver-rated JPMorgan Core Bond tends to keep its duration neutral to the Bloomberg Barclays U.S. Aggregate Bond Index, its portfolio differs markedly from the index and peers in the intermediate-term bond category. The fund typically allocates more to mortgages than its peers (40%-65%), while 15%-35% of the portfolio is typically devoted to investment-grade corporate and asset-backed securities, and 15%-33% to Treasuries. The fund avoids junk-rated debt and focuses on bonds the team expects to hold until maturity. This results in a generally high-quality portfolio with low turnover. Compared with peers who are not as focused on mortgages and aren't as conservative with credit risk, the fund has lagged lately. However, the fund's consistent and defensive return profile led our manager research team to award it a Positive Performance rating.

Metropolitan West Total Return Bond (MWTRX) This Gold-rated fund's more conservative profile has resulted in decent, though not stellar, returns compared with peer funds during the past few years, says associate director of fixed-income strategies Karin Anderson. Though the current portfolio's duration is slightly short of the benchmark and it devotes less than 5% to below-investment-grade securities, prospective investors should be aware that the managers have a wide latitude to adjust the fund's duration and credit exposure. Duration can run anywhere from 2 to 8 years, and the fund can hold up to 20% of assets in below-investment-grade securities. But the managers dial risk up and down in predictable fashion based on their disciplined approach to valuations, and over the long term, the team's eye for value and well-timed moves into credit have paid off handsomely, Anderson said.

Karen Wallace does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.

NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE

JPMORGAN CORE BOND FUND I SHARES WOBDX

ANNUAL OPERATING EXPENSES (%)

Gross expenses

I shares

0.66

Net expenses 0.50

The Fund's adviser and/or its affiliates have contractually agreed to waive fees and/or reimburse expenses to the extent Total Annual Fund Operating Expenses (excluding acquired fund fees and expenses, dividend and interest expenses related to short sales, interest, taxes, expenses related to litigation and potential litigation and extraordinary expenses) exceed 0.75% for A Shares, 1.40% for C Shares, 0.50% for I Shares, 1.10% for R2 Shares, 0.85% for R3 Shares, 0.60% for R4 Shares, 0.45% for R5 Shares and 0.35% for R6 Shares of the average daily net assets. The Fund may invest in one or more money market funds advised by the adviser or its affiliates (affiliated money market funds). The Fund's adviser has contractually agreed to waive fees and/or reimburse expenses in an amount sufficient to offset the fees and expenses of the affiliated money market funds incurred by the Fund because of the Fund's investment in such money market funds. This waiver is in effect through 10/31/2018 for A Shares, 10/31/2018 for C Shares, 10/31/2018 for I Shares, 10/31/2018 for R2 Shares, 10/31/2018 for R3 Shares, 10/31/2018 for R4 Shares, 10/31/2018 for R5 Shares and 10/31/2018 for R6 Shares, at which time the adviser and/or its affiliates will determine whether to renew or revise it. The difference between net and gross fees includes all applicable fee waivers and expense reimbursements.

TOP TEN HOLDINGS AS OF 7/3 1 /17 ( %)

U.S. Treasury STRIPS Bonds, 3.44%, 05/15/2020

1.3

U.S. Treasury STRIPS, 2.74%, 05/15/2023

0.9

Resolution Funding Corp. STRIPS, 1.90%, 07/15/2020

0.8

U.S. Treasury STRIPS Bonds, 3.09%, 08/15/2020

0.8

U.S. Treasury STRIPS Bonds, 3.13%, 02/15/2023

0.8

U.S. Treasury STRIPS Bonds, 2.14%, 02/15/2021

0.8

U.S. Treasury STRIPS Bonds, 2.66%, 02/15/2022

0.7

U.S. Treasury Bonds, 4.38%, 05/15/2040

0.7

U.S. Treasury STRIPS Bonds, 2.66%, 11/15/2022

0.6

U.S. Treasury STRIPS Bonds, 3.27%, 05/15/2032

0.6

TOTAL OF TOP TEN

8.0

The top 10 holdings listed reflect only the Fund's long-term investments. Short-term investments are excluded. Holdings are subject to change. The holdings listed should not be considered recommendations to purchase or sell a particular security. Each individual security is calculated as a percentage of the aggregate market value of the securities held in the Fund and does not

include the use of derivative positions, where applicable.

PERFORMANCE

(%) as of 6/30/17 I shares at NAV Bloomberg Barclays U.S. Aggregate Index Lipper Core Bond Funds Index

1 year -0.19 -0.31 0.61

3 years 2.44 2.48 2.64

5 years 2.19 2.21 2.69

10 years 4.76 4.48 4.51

Performance quoted is past performance and is no guarantee of future results. Investment returns and principal value will fluctuate, so shares, when sold, may be worth more or less than original cost. Current performance may be higher or lower than returns shown. Call 1-800-480-4111 for most recent month-end performance.



NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE

Contact JPMorgan Distribution Services at 1-800-480-4111 for a fund prospectus. You can also visit us at . Investors should carefully consider the investment objectives and risks as well as charges and expenses of the mutual fund before investing. The prospectus contains this and other information about the mutual fund. Read the prospectus carefully before investing. Must be accompanied or preceded by a prospectus.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be recommendation for any specific investment product, strategy, plan feature or other purposes. By receiving this communication you agree with the intended purpose described above. Any examples used in this material are generic, hypothetical and for illustration purposes only. None of J.P. Morgan Asset Management, its affiliates or representatives is suggesting that the recipient or any other person take a specific course of action or any action at all. Communications such as this are not impartial and are provided in connection with the advertising and marketing of products and services. Prior to making any investment or financial decisions, an investor should seek individualized advice from personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor's own situation. Diversification does not guarantee investment returns and does not eliminate the risk of loss. Diversification among investment options and asset classes may help to reduce overall volatility. RISK SUMMARY: The following risks could cause the fund to lose money or perform more poorly than other investments. For more complete risk information, see the prospectus. Investments in bonds and other debt securities will change in value based on changes in interest rates. If rates rise, the value of these investments generally drops. Investments in derivatives may be riskier than other types of investments. They may be more sensitive to changes in economic or market conditions than other types of investments. Many derivatives create leverage, which could lead to greater volatility and losses that significantly exceed the original investment. The value of investments in mortgage-related and asset-backed securities will be influenced by the factors affecting the housing market and the assets underlying such securities. The securities may decline in value, face valuation difficulties, become more volatile and/or become illiquid. They are also subject to prepayment risk, which occurs when mortgage holders refinance or otherwise repay their loans sooner than expected, creating an early return of principal to holders of the loans. The Fund could experience a loss and its liquidity may be negatively impacted when selling securities to meet redemption requests by shareholders. The risk of loss increases if the redemption requests are unusually large or frequent or occur in times of overall market turmoil or declining prices. Similarly, large purchases of Fund shares may adversely affect the Fund's performance to the extent that the Fund is delayed in investing new cash and is required to maintain a larger cash position than it ordinarily would. INDEXES: The Bloomberg Barclays U.S. Aggregate Index is an unmanaged index representing SEC-registered taxable and dollar denominated securities. It covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through, and asset-backed securities. The performance of the Lipper Core Bond Funds Index includes expenses associated with a mutual fund, such as investment management fees. These expenses are not identical to the expenses charged by the Fund. Total return assumes reinvestment of dividends and capital gains distributions and reflects the deduction of any sales charges, where applicable. Performance may reflect the waiver of a portion of the Fund's advisory or administrative fees and/or reimbursement of certain expenses for certain periods since the inception date. If fees had not been waived and/or certain expenses were not reimbursed, performance would have been less favorable. There can be no assurance that the professionals currently employed by J.P. Morgan Asset Management will continue to be employed by J.P. Morgan Asset Management or that the past performance or success of any such professional serves as an indicator of such professional's future performance or success. The Morningstar Analyst Rating is not a credit or risk rating. It is a subjective evaluation performed by the manager research analysts of Morningstar. Morningstar evaluates funds based on five key pillars, which are process, performance, people, parent, and price. Analysts use this five pillar evaluation to determine how they believe funds are likely to perform over the long term on a risk-adjusted basis. They consider quantitative and qualitative factors in their research, and the weighting of each pillar may vary. The Analyst Rating scale is Gold, Silver, Bronze, Neutral, Negative. A Morningstar Analyst Rating of Gold, Silver, or Bronze reflect an Analyst's conviction in a fund's prospects for outperformance. Analyst Ratings are continuously monitored and reevaluated at least every 14 months. For more detailed information about Morningstar's Analyst Rating, including its methodology, please go to The Morningstar Analyst Rating should not be used as the sole basis in evaluating a mutual fund. Morningstar Analyst Ratings involve unknown risks and uncertainties which may cause Morningstar's expectations not to occur or to differ significantly from what we expected. J.P. Morgan Funds are distributed by JPMorgan Distribution Services, Inc., which is an affiliate of JPMorgan Chase & Co. Affiliates of JPMorgan Chase & Co. receive fees for providing various services to the funds. JPMorgan Distribution Services, Inc. is a member of FINRA/SIPC. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co and its affiliates worldwide. ? JPMorgan Chase & Co., August 2017 REP-MS-4CBF



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