Reprinted by permission of Morningstar, Oct. 20, 2016
JPMorgan Hedged Equity C JHQCX
This collared S&P 500 fund has a distinctive options overlay.
Morningstar's Take JHQCX
Morningstar Rating
Morningstar Analyst Rating
´
Morningstar Pillars
Process
Performance
People
Parent
Price
¶
¶
∞
∞
∞
Neutral
Neutral
Positive
Positive
Positive
Role In Portfolio
Supporting
Fund Performance JHQCX
Year
YTD
2015
2014
2013
2012
Total Return (%)
4.82
-2.19
8.82
n/a
n/a
+/- Category
1.59
-1.69
4.47
n/a
n/a
Data through 9-30-16
This fund differs from a typical collar strategy, which
involves selling calls and buying puts against a long
equity position. While this fund does hold a long
equity position and sell out-of-the-money calls, it
constructs a put spread instead of buying outright
puts. This put spread--which involves buying puts at
one strike price and selling puts further out of the
money--is intended for protection from market selloffs in the range of negative 5% to negative 20%.
However, in periods of serious market stress (such
as Black Monday in 1987, where the S&P 500
dropped 23% in a single day), the short out-of-themoney put leg of the spread may expose the fund to
unexpected losses. In more typical market
circumstances, this fund should produce a
competitive track record relative to peers, with
performance characteristics similar to a 60/40
portfolio.
The fund’s low fees relative to alternatives fund
peers (and on an absolute basis) increase its appeal.
10-19-16 | by Tayfun Icten
JPMorgan Hedged Equity features a well-defined
strategy and experienced management team. But the
fund’s relatively short track record limits its initial
Morningstar Analyst Rating to Bronze.
Managers Hamilton Reiner and Raffaele Zingone run
a long equity portfolio that replicates the S&P 500
and collar that portfolio with an option overlay. The
fund uses options to hedge its 100% long equity
exposure such that the resulting portfolio exposure
is similar to a 60/40 equity/bond portfolio, without
duration risk. The fund’s since-inception beta of 0.55
indicates modest equity market participation, a
product of its option overlay design, which yields a
similar risk/return profile to a 60/40 portfolio. So far
the fund has produced a track record compatible with
that thesis, albeit for a relatively short period. Since
its December 2013 inception, it has outperformed the
Morningstar Moderate Target Risk Index by 0.61%
annualized with comparable volatility (6.6% versus
6.8% for the index).
Process Pillar ¶ Neutral | Tayfun Icten
10/19/2016
This fund’s well-defined and disciplined process
needs to prove its robustness during a longer time
period. It earns a Neutral Process rating.
Hamilton Reiner and Raffaele Zingone implement
this fund’s strategy in a disciplined manner without
any market-timing. The fund’s core long equity
portfolio replicates the S&P 500 by investing in a
subset of its constituents. But it aims to outperform
that index by tweaking the individual stock exposure
within a 1-percentage-point range, using a dividend
discount model that ranks stocks from most
attractive to least attractive. The option overlay is
systematically constructed and reset on a quarterly
basis. The fund typically buys 5% out-of-the-money
puts, sells 20% out-of-the-money puts, and also sells
3.5%-5.5% out-of-the-money calls depending on
market conditions. As the fund’s long equity portfolio
closely replicates the S&P 500, and the option
© 2016 Morningstar, Inc. All rights reserved. The Morningstar name is a registered trademark of Morningstar, Inc.
overlay is on the same reference asset, the basis risk
is negligible.
This fund’s return generation is augmented by two
potential sources of excess return. First, the fund
aims to earn excess volatility risk premiums from
selling out-of-the-money puts. Second, the long
portfolio can modestly outperform the S&P 500. It is
too early to tell whether the fund will be able to take
advantage of these alpha sources in the long run.
As of June 2016, there were 230 stocks in the core
long portfolio with nearly identical sector allocations
to the S&P 500, with slight overweightings to the
consumer discretionary and financial sectors and
slight underweightings to consumer staples and
telecommunication services. Comanager Raffaele
Zengone manages $25 billion in enhanced-index
products across JPMorgan’s stable of funds, and his
portfolios on aggregate have outperformed its
benchmark S&P 500 by 1.1% annualized during the
past 10 years, according to data from JPMorgan.
Hamilton Reiner, who focuses on the options portion
of the strategy, constructs a zero-cost option overlay
at the beginning of each calendar quarter and resets
at the end of the quarter. The premium income
received from selling 3%-5% out-of-the-money calls
and 20% out-of-the-money puts fund the purchase
of 5% out-of-the-money puts. The fund participates
in 55%-85% of market rallies, while in down markets
its net exposure drops to near zero by the time the
loss levels reach 5%-6%. In scenarios where the
market sells off 5%-20% in a given quarter, the fund
aims to protect capital. Call premiums received
should improve with higher market volatility and
higher interest rates, thus improving the fund’s
upside in such a market environment.
Performance Pillar ¶ Neutral | Tayfun Icten
10/19/2016
The fund has performed well, but its record is
relatively short when compared with its largest
Reprinted by permission of Morningstar, Oct. 20, 2016
competitors, leading to a Performance rating of
Neutral.
The fund has performed well on both an absolute and
risk-adjusted basis. From its December 2013
inception through September 2016, it has returned
5.4% annualized, outperforming the option-writing
Morningstar Category by 2.2%. During this period,
the fund achieved a Sharpe ratio of 0.74, versus 0.45
for the average fund in the category, roughly
matching the S&P 500’s 0.77. The fund’s sinceinception annualized volatility of 6.6% is roughly
equal to the Morningstar Moderate Target Risk Index
(6.8%) but much lower than the S&P 500's 11%. This
is not surprising given this fund’s overall 0.55 beta
to the S&P 500.
The option overlay provides some downside
protection, but also cuts some of the upside. The fund
is designed to protect capital from market sell-offs
of roughly negative 5% to negative 20%. For steeper
market drops, it could incur losses greater than 5%.
This fund’s performance would probably benefit from
higher interest rates and volatility. Higher volatility
would likely increase premiums received from short
out-of-the-money puts and calls, and higher interest
rates would further improve premiums received from
selling calls. This fund also earns a 1.4% dividend,
which is not used for purchasing options.
People Pillar ∞ Positive | Tayfun Icten
10/19/2016
With an experienced management team that invests
alongside shareholders, the fund earns a Positive
People Pillar rating.
The named portfolio managers of this fund are
Hamilton Reiner and Raffaele Zingone. Reiner, a
managing director at JPMorgan Chase, is more
actively involved in the day-to-day management of
this fund and brings in significant derivatives
experience. Reiner joined the firm in 2009, and prior
to this role was the head of U.S. equity derivatives.
Before JPMorgan, Reiner held senior positions at
Barclays Capital, Lehman Brothers, and Deutsche
Bank, and he spent the first 10 years of his career at
O’Connor and Associates, an options specialist firm.
Reiner received a B.S.E. in finance from the Wharton
School of the University of Pennsylvania.
Zingone, also a managing director, joined the firm
back in 1991. He is responsible for the Research
Enhanced Index strategies at the firm. He joined the
firm as a quantitative equity analyst and later served
as an equity portfolio manager in London and New
York. Zingone received an M.B.A. in finance from
New York University. Reiner and Zingone are
assisted by 27 equity analysts at JPMorgan Asset
Management. Both managers invest between
$100,001 and $500,000 in this fund, a solid sign of
coinvestment with shareholders, if not quite
matching industry best practices.
Parent Pillar ∞ Positive | Tayfun Icten
02/26/2016
J.P. Morgan Asset Management is one of the largest
asset managers in the world, with nearly $2 trillion
in assets. After healthy inflows in 2015, it continues
to rank among the top 10 U.S. mutual fund
companies. Its U.S. fund business boasts a diverse
lineup of more than 120 funds and ETFs supported by
a global investment team, and a distribution effort
centered on education has built advisor trust.
Many of the most popular funds are Morningstar
Medalists, and a number are run by managers on the
job for a decade or more, including Jonathan Simon
of JPMorgan Mid Cap Value FLMVX and Giri
Devulapally of JPMorgan Large Cap Growth SEEGX.
While Doug Swanson, longtime manager of the
firm’s largest fund, JPMorgan Core Bond WOBDX,
began a leave of absence in 2015, veteran Barb
Miller stepped in, supported by the same strong
team. The SmartRetirement target-date series is
another bright spot. The lineup earns an average of
3 stars but has been improving. One concern has
been whether the fast-growing JPMorgan Strategic
Income Opportunities JSOSX has been adequately
supported, though it has seen outflows lately.
An experienced board of trustees has maintained
strong oversight, and fees are competitive. Manager
investment in the funds has increased significantly,
and compensation now factors in 10-year
performance where applicable, which exceeds
industry standards.
© 2016 Morningstar, Inc. All rights reserved. The Morningstar name is a registered trademark of Morningstar, Inc.
Price Pillar ∞ Positive | Tayfun Icten 10/19/2016
A substantial part of this fund’s assets resides in the
Select class, which charges 0.60%, low compared
with similarly distributed alternatives funds. The A
class charges a higher 0.80%, but that is still low
compared with peers. Thus, the fund’s Price rating is
Positive. The fund has had fee waivers of 0.18% in
place that expire at the end of October 2016. If the
waiver were not renewed, the fund would still have
a fee advantage, though to a lesser degree.
NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE
JPMORGAN HEDGED EQUITY FUND
A SHARES: JHQAX | C SHARES: JHQCX | SELECT SHARES: JHEQX
ANNUAL OPERATING EXPENSES (%)
Shares
Expense cap
Total expenses
Total reductions
Net expenses
A
0.85
1.24
(0.39)
0.85
C
1.35
1.65
(0.30)
1.35
Select
0.60
0.91
(0.31)
0.60
The cap on annual operating expenses is guaranteed in a fee waiver contract with the investment
advisor, administrator and distributor. The cap does not extend to acquired fund costs, dividend
expenses relating to short sales, interest, taxes, extraordinary expenses and expenses related to
the Board of Trustees’ deferred compensation plan. The cap may be modified or discontinued after
10/31/2016. “Total reductions” includes all applicable fee waivers and expense reimbursements.
TOP 10 HOLDINGS (%) AS OF 9/30/16
Apple, Inc.
3.3
Microsoft Corp.
3.0
Facebook, Inc., Class A
1.9
Exxon Mobil Corp.
1.8
Amazon.com, Inc.
1.8
Pfizer, Inc.
1.6
Alphabet, Inc., Class A
1.5
Wells Fargo & Co.
1.5
Alphabet, Inc., Class C
1.5
PepsiCo, Inc.
1.4
TOTAL OF TOP 10 19.3
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
Quarterly returns (%) as of 9/30/16
1 year
Since inception*
A shares at NAV
9.22
5.13
A shares with 5.25% max. sales charge
3.47
3.12
C shares
8.75
4.62
C shares with 1.00% max. sales charge
7.75
4.62
Select shares
9.45
5.41
S&P 500 Index
15.43
9.68
BofA Merrill Lynch 3-Month U.S. Treasury Bill Index
0.27
0.12
Lipper Alternative Long/Short Equity Funds Average
2.66
0.98
*Since inception: 12/13/2013.
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.
jpmorganfunds.com
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 www.jpmorganfunds.com. 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.
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 for certain periods since the inception date. If fees had not been waived, performance would have been less favorable.
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.
Hedged Equity Fund: 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 prices of equity securities are sensitive to a wide range of factors,
from economic to company-specific news, and can fluctuate rapidly and unpredictably, causing an investment to decrease in value. Positions in equity options can reduce equity market risk, but can limit
the opportunity to profit from an increase in the market value of stocks in exchange for upfront cash at the time of selling the call option. Unusual market conditions or the lack of a ready market for any
particular option at a specific time may reduce the effectiveness of option strategies and could result in losses.
Growth Advantage Fund: Small-capitalization investments typically carry more risk than investments in well-established “blue-chip” companies since smaller companies generally have a higher risk of
failure. Historically, smaller companies’ stock has experienced a greater degree of market volatility than the average stock.
Mid Cap Value Fund: Mid-cap funds typically carry more risk than funds investing in well-established “blue-chip” companies and have historically experienced a greater degree of volatility than the average stock.
Large Cap Growth Fund: The prices of equity securities are sensitive to a wide range of factors, from economic to company-specific news, and can fluctuate rapidly and unpredictably, causing an investment
to decrease in value.
Core Bond Fund: 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.
Strategic Income Opportunities Fund: Securities rated below investment grade are considered “high-yield,” “non-investment grade,” “below investment-grade,” or “junk bonds.” They generally are rated
in the fifth or lower rating categories of Standard & Poor’s and Moody’s Investors Service. Although they can provide higher yields than higher rated securities, they can carry greater risk. International
investing bears greater risk due to social, economic, regulatory and political instability in countries in “emerging markets.” This makes emerging market securities more volatile and less liquid developed
market securities. Changes in exchange rates and differences in accounting and taxation policies outside the U.S. can also affect returns.
SmartRetirement Funds: Certain underlying J.P. Morgan Funds may invest in foreign/emerging market securities, small capitalization securities and/or high-yield fixed income instruments. There may
be unique risks associated with investing in these types of securities. International investing involves increased risk and volatility due to possibilities of currency exchange rate volatility, political, social or
economic instability, foreign taxation and differences in auditing and other financial standards. The Fund may invest a portion of its securities in small-cap stocks. Small-capitalization funds typically carry
more risk than stock funds investing in well-established “blue-chip” companies since smaller companies generally have a higher risk of failure. Historically, smaller companies’ stock has experienced a
greater degree of market volatility than the average stock. Securities rated below investment grade are called “high yield bonds,” “non-investment grade bonds,” “below investment-grade bonds,” or “junk
bonds.” They generally are rated in the fifth or lower rating categories of Standard & Poor’s and Moody’s Investor Service. Although these securities tend to provide higher yields than higher rated securities,
there is a greater risk that the Fund’s share price will decline. Real estate funds may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector.
Real estate funds may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general and economic conditions, changes in the value of the underlying property
owned by the trust and defaults by borrower.
INDEXES: The S&P 500 Index is an unmanaged index generally representative of the performance of large companies in the U.S. stock market. Index levels are in total return USD. The performance of the
index does not reflect the deduction of expenses associated with a fund, such as management fees. By contrast, the performance of the Fund reflects the deduction of the fund expenses, including sales
charges if applicable. An individual cannot invest directly in an index. The BofA Merrill Lynch 3-Month U.S. Treasury Bill Index is comprised of a single issue purchased at the beginning of the month and
held for a full month. Each month the index is rebalanced and the issue selected is the outstanding Treasury Bill that matures closest to, but not beyond 3 months from the rebalancing date. The
performance of the index does not reflect the deduction of expenses associated with a fund, such as investment management fees. By contrast, the performance of the Fund reflects the deduction of the
fund expenses, including sales charges if applicable. An individual cannot invest directly in an index. The performance of the Lipper Alternative Long/Short Equity Funds Average includes expenses
associated with a mutual fund, such as investment management fees. These expenses are not identical to the expenses charged by the Fund.
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 http://corporate1.morningstar.com/AnalystRating/
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 marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management
Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc.
© JPMorgan Chase & Co., October 2016
REP-MS-HE
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