JPMorgan Strategic Income Opportunities Fund
Market review Political events in the US and in Europe dictated much of the price action across markets in July. It was a volatile month as economic data remained weak and the markets experienced turbulence from both European sovereign debt tremors and the US debt ceiling impasse. While policymakers in Europe finally secured another band-aid solution for Greece, lack of progress in Washington on the debt ceiling turned the prospect of a US default and/or downgrade from an unlikely tail risk event to a real concern weighing on the markets. Economic data flowing in during the month kept investors guessing whether the global economy is in a soft patch or headed for a prolonged period of deceleration. Investors remained cautious stoking Treasury demand even in the face of a downgrade threat from one of the rating agencies. Some areas of improvement included indicators of a budding recovery in Japan, which is widely expected to gain momentum in the second half of the year, as well as better than expected housing starts in the US, which could contribute to a stronger Q3. The Barclays Capital U.S. Government Bond Index returned 1.67% during July, with Treasury yields falling across the yield curve. High yield debt underperformed government bonds for the month by 51 bps, with the Barclays Capital U.S. High Yield Index returning 1.16%. Investment grade credit outperformed government bonds, with the Barclays Capital U.S. Credit Index returning 2.41%. Key portfolio drivers In July, the Fund was negatively impacted by synthetic long distressed credit positions as well as tactical interest rate positions. Allocations to high yield bonds, agency mortgagebacked securities and shorts on sovereigns and emerging market debt contributed positively to performance. Synthetic long credit positions experienced volatility as investors sought out high yield derivatives, without regard to underlying fundamentals, to hedge other types of risk. This caused a dramatic disconnect between traditional and synthetic high yield indices. The chart below illustrates that: Cash bond vs. synthetic high yield indices in July
2 0 -2 -4 -6 -8 -10 -12 -14
Merrill Lynch HY Master II Index Merrill Lynch HY CCC and Below Index HY CDX Index 5 widest 5yr names in HY CDX Next 5 widest 5yr names in HY CDX 4 widest 3yr names in HY CDX Next 5 widest 3yr names in HY CDX 5 widest 1yr names in HY CDX Next 4 widest 1 yr names in HY CDX
-11.81 -10.91 1.24 0.51 -1.38 -3.03 -5.00 -7.04


Source: Bloomberg as of July 31, 2011. For illustrative purposes only.

Insight + Process = ResultsSM

. are not at imminent risk of default. which is also supported by their bond and equity valuations. The total credit allocation (including investment grade. For illustrative purposes only.500 100 90 86. and as such presents tremendous opportunity given lack of catalysts for short-term default. while its shortdated CDS has shot up dramatically in recent weeks. • Closed-end fixed income funds position remained under 1%. • High yield bonds represented 26%. 2011. while distressed. in our view. and synthetic long credit positions) finished the month at approximately 52% of fund assets. in select cases beyond what we observed in 2008. These included: • Short-dated synthetic long credit: 3 to 18 month maturities. Fund’s short exposure represents 22% of long exposure. high yield and distressed credits. approaching where it was during the crisis.366 79. emerging markets and sovereign debt. Hovnanian Enterprises.500 97.NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE JPMorgan Strategic Income Opportunities Fund Fund positioning The Fund maintained its long-oriented allocation toward risk in July. the short-dated CDS are trading at spread levels dramatically disconnected from cash bonds. HOV 2014 Bonds – 30 months to maturity Last Price High on 03/22/11 Average Low on 07/20/09 86. However. based on our analysis. The spread widening here has been due to investors using high yield derivatives without regard to fundamentals to hedge other types of risk. while also adding to existing high conviction shorts as well as initiating new short positions. During the month liquidity was put to work in select areas of the market.761 48. and is diversified across mezzanine commercial mortgage-backed securities. and selected corporate credit default swaps. high yield synthetic positions represented 15% • Non-agency mortgage-backed securities accounted for approximately 4% • Investment grade credit represented 1%. We continued to build on exposure to short maturity credit default swaps (CDS) of select corporate issuers. whose January 2014 bonds are trading substantially above their crisis levels.500 80 70 60 50 Sep 2009 Dec Mar Jun 2010 Sep Dec Mar Jun 2011 Source: Bloomberg as of July 31. This area of the market is experiencing technically driven stress. The names in this part of the portfolio. • One example illustrated below is a distressed homebuilder.

Bottom line is. in our view. history tells us opportunities like these are exceptionally rare.NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE JPMorgan Strategic Income Opportunities Fund HOV 2 Year CDS Last Price High on 07/27/11 Average Low on 02/18/11 2126.76 at month-end. This position grew to -2% and is not reflective of our view on Munis overall. This part of the curve has seen substantial richening with 2 year Treasuries right on top of the Fed Funds rate.424 1070. • Initiated short US position via US sovereign CDS. We continue to find little value in the rates sector and avoid allocations in long-term interest rates. Also a possible play on the US downgrade scenario. 2011. more attractively priced risks in the portfolio. we have been taking advantage of what we believe are current panic levels in short-dated CDS and positioning the portfolio for strong returns. in which the spread on this index may widen. as well as positioning for a curve flattening scenario with 5s/30s and 5s/10s flatteners. . but rather the substantial richening of the price of this broad Muni index. • Increased EMD short to -2%.114 443. a cheap short against other. Portfolio duration was 0. since even 6 month protection on HOV is trading at nearly 10 points up front. • Initiated short 2 year Treasury position.003 2126. while targeting the short-end of the yield curve with tactical shorts on the 2yr. While it is impossible to time the bottom. which may widen as a result of continued down.165 2000 1500 1000 500 Sep 2009 Dec Mar Jun 2010 Sep Dec Mar 2011 Jun Source: Bloomberg as of July 31.grade fears. The market is not currently differentiating among CDS tenors with respect to pricing of default risk. For illustrative purposes only.165 2174. at 26bps as we are writing this. • Short Muni position via MCDX. This area of the market remains relatively rich and continues to be.

Inc. etc. Inc.S. The performance of the index does not reflect the deduction of expenses associated with a fund. When the value of a fund’s securities goes down. and currency instability . including sales charges if applicable. We believe the information provided here is reliable. capitalization. receive fees for providing various services to the funds. Argentina. including sales charges if applicable. which leads to increased volatility. 2009) are also included. corporations.. ©JPMorgan Chase & Co. Opinions. The prospectus contains this and other information about the mutual fund. 144-As and pay-in-kind bonds (PIKs.. The Fund will invest no more that 50% of its total assets in foreign and emerging markets securities. estimates. is a member FINRA/SIPC. Affiliates of JPMorgan Chase & Co. By contrast. at 1-800-480-4111 for a fund prospectus. which is an affiliate of JPMorgan Chase & Co. as of October 1. Foreign Agency. An individual cannot invest directly in an index. If rates increase.. Eurobonds and debt issues from countries designated as emerging markets (e.e. The Fund’s investments in emerging markets could lead to more volatility in the value of the Fund’s shares. step-up coupon structures.S. such as investment management fees. They are not recommendations. including additional costs associated with covering short positions and a possibility of unlimited loss on certain short sale positions.NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE JPMorgan Strategic Income Opportunities Fund Contact JPMorgan Distribution Services. the performance of the Fund reflects the deduction of the mutual fund expenses. The Barclays Capital U. Government. The performance of the index does not reflect the deduction of expenses associated with a fund. The Barclays Capital U. Government/Credit Index. Supranational. Emerging markets may not provide adequate legal protection for private or foreign investment or private property. sometimes rapidly or unpredictably.jpmorganfunds. Inc. By contrast. An individual cannot invest directly in an index. there is a greater risk that the Fund’s share price will decline. the performance of the Fund reflects the deduction of the fund expenses. political. Government Bond Index is an unmanaged index composed of securities issued by the U. Read the prospectus carefully before investing. Security Capital Research & Management Incorporated and JPMorgan Alternative Asset Management.. forecasts and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. Short selling involves certain risks. Those businesses include. the performance of the Fund reflects the deduction of the fund expenses. The Fund’s investment in equity securities may rise or fall because of changes in the broad market or changes in a company’s financial condition. JPMorgan Distribution Past performance is no guarantee of future results. The Fund may invest in futures contracts and derivatives. such as investment management fees. but are not limited to. J. An individual cannot invest directly in an index. and Foreign Local Government. and non-U. INDEXES DEFINED: The Barclays Capital U.especially in emerging markets. This will likely result in additional tax consequences. The Fund has the ability to invest 100% of its total assets in high yield securities. and to not be interpreted as. which include both U. Many derivatives create leverage thereby causing the Fund to be more volatile than it would be if it had not used derivatives. August 2011 . The small size of securities markets and the low trading volume may lead to a lack of liquidity.S. Inc. an investment in a fund decreases in value. including economic. The securities highlighted above have been selected based on their significance. There is no guarantee that the use of long and short positions will succeed in limiting the Fund’s exposure to domestic stock market movements. JPMorgan Investment Management Inc. The corporate sectors are Industrial. Utility. including sales charges if applicable. the value of the Fund’s investments generally declines. Investment in a portfolio involved in long and short selling may have higher portfolio turnover rates. References to specific securities. but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. Brazil. A complete list of firm recommendations in the Portfolio for the last year is available upon request.S. The Fund may invest in securities that are below investment grade (i. recommendations. asset classes and financial markets are for illustrative purposes only and are not intended to be. These views and strategies described may not be suitable for all investors. By contrast. Ordinarily the Fund will invest no more than 75% of its total assets in credit securities. International investing involves special risks. High Yield Index covers the universe of fixed rate.P. Venezuela..P. Original issue zeroes. “high yield” or “junk bonds”) that are generally rated in the fifth or lower rating categories of Standard & Poor’s and Moody’s Investors Service. The Fund has an absolute return orientation which means that it is not managed relative to an index. Diversification does not guarantee investment returns and does not eliminate the risk of loss. such as investment management fees. It includes both corporate and non-corporate sectors. The performance of the index does not reflect the deduction of expenses associated with a mutual fund. non-investment grade debt. J. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Although these securities tend to provide higher yields than higher rated securities.S.S.) are excluded. The non-corporate sectors are Sovereign. Morgan Funds are distributed by JPMorgan Distribution Services. and Finance.g. Credit Index is a sub-index of the Barclays Capital U.S. Investors should carefully consider the investment objectives and risks as well as charges and expenses of the mutual fund before investing. RISKS ASSOCIATED WITH INVESTING IN THE FUND: The Fund’s fixed income securities are subject to interest rate risk. You can also visit us at www. sector-swings or other risk factors.

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