Today’s profile piece in Barron’s features the JPMorgan Equity Income Fund (OIEIX; Class A shares). This $10.6 billion fund has a 5.25% maximum sales charge, 1.04% capped net expense ratio and 22% turnover. According to the article

[The] fund has beaten 94% of its peers over the past five and 10 years.

The prospectus benchmark for the fund is the Russell 1000® Value Index. One of the long-lived implementations of this index is the iShares Russell 1000 Value ETF (IWD). Alpholio™’s calculations show that since late 2004 the fund returned more than the ETF in only about 46% of all rolling 36-month periods, 45% of 24-month periods and 42% of 12-month periods. The median underperformance was 1.4%, 1.6% and 0.8%, respectively.

While a comparison of periodic returns is instructive, it does not adjust for the fund’s risk. To accomplish the latter, let’s apply a variant of Alpholio™’s patented methodology that constructs a custom reference portfolio of ETFs for each analyzed fund. The reference portfolio has a fixed ETF membership but variable weights, which allows for better tracking of the fund. Here is the resulting chart of the cumulative RealAlpha™ for JPMorgan Equity Income:

Cumulative RealAlpha™ for JPMorgan Equity Income Fund (OIEIX)

The fund generated -0.7% of the regular and +0.4% of the lag annualized discounted RealAlpha™ (to learn more about this and other performance measures, please visit our FAQ). This indicates that the fund’s security selection did not add value on a fully risk-adjusted basis. At 12.7%, the fund’s standard deviation (a measure of volatility) was approximately 0.5% lower than that of the reference portfolio. The fund’s RealBeta™ was around 0.87.

The following chart demonstrates ETF weight changes in the reference portfolio over the same analysis period:

Reference Weights for JPMorgan Equity Income Fund OIEIX)

The fund had major equivalent positions in the iShares Morningstar Large-Cap Value ETF (JKF; average weight of 19.4%), iShares Select Dividend ETF (DVY; 14.9%), SPDR® Dow Jones® Industrial Average ETF (DIA; 13.5%), iShares Morningstar Large-Cap ETF (JKD; 11.1%), First Trust Value Line® Dividend Index Fund (FVD; 9.7%), and iShares S&P 500 Growth ETF (IVW; 9.4%). The Other component in the chart collectively represents six additional equity ETF with smaller average weights.

Over the past 11 years, the JPMorgan Equity Income Fund did not add value on a truly risk-adjusted basis, although it outperformed its lag reference ETF portfolio. With over 100 individual holdings and top-ten holdings accounting for 24% of assets, the fund appears to be reasonably diversified. The fund distributes income monthly and capital gains annually; historical distributions were not excessive, which made the fund suitable for taxable accounts. A steep front load does not improve the fund’s appeal.

To learn more about the JPMorgan Equity Income and other mutual funds, please register on our website.

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