INVESTMENT INSIGHTS Building better fixed income portfolios

INVESTMENT INSIGHTS

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Building better fixed income portfolios

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Interest rates are near their 60-year lows. Short-term rates and real yields (i.e., yields after inflation) on some fixed income investments are close to zero. For both institutional and individual investors, asset allocation remains a primary driver of investment returns. Even in a low rate environment, bonds provide needed income and can reduce overall portfolio volatility. Nevertheless, low rates, global uncertainty and the potential for inflation create challenges for fixed income investors: ? Producing enough income ? Hedging against possible losses if bond rates rise ? Combating the erosion of purchasing power over time Appropriately diversified fixed income investors can access total return opportunities while maintaining the income potential and diversification benefits that bonds have historically provided.

9/30/81: 15.84%

10% Nominal yield average: 6.23%

5%

Nominal 10-year Treasury yield 12/31/15: 2.27%

Real yield

0%

average: 2.46%

Real 10-year Treasury yield

12/31/15: 0.25%

-5%

'58

'63

'68

'73

'78

'83

'88

'93

'98

'03

'08

'13

Source: Federal Reserve, BLS, J.P. Morgan Asset Management. Data as of 12/31/15. For illustrative purposes only. Past performance is not indicative of future returns. Real 10-year Treasury yields are calculated as the daily Treasury yield less year-over-year core inflation for that month except for June 2015, where real yields are calculated by subtracting out May 2015 year-over-year core inflation.

Diversification does not guarantee investment returns and does not eliminate the risk of loss. Investments in fixed income securities are subject to interest rate risk. If rates increase, the value of the investment generally declines.

INVESTMENT INSIGHTS

THE IMPACT OF RISING RATES CAN VARY GREATLY

While bonds will likely be adversely impacted by rising rates, the impact won't be uniform across all bond types. Different bond market sectors, structures and maturities respond differently to changing interest rates. For example, high-yield bonds tend to be less sensitive to rates than U.S. Treasuries. The same is true for shorter-term bonds. That's why diversification can help manage risk and reduce the overall impact rising rates might have on your bond portfolio.

PRICE IMPACT OF A 1% MOVE IN INTEREST RATES

9.4%

8.8%

2.0%

5.2%

4.9%

4.3%

5.8%

5.7%

3.7%

2.8%

4.6%

0.1%

-2.0%

-4.5%

-4.7%

2 year 5 year TIPS

UST

UST

-8.5%

-0.1%

-4.3%

-5.2%

-5.6%

-5.3%

10 year Floating U.S. HY EMD ($) U.S.

MBS

UST

rate

Aggregate

-2.7% -4.8%

-10.7% 1-5 year 1-15 year Muni HY Munis Munis

KEY

+1%

-1%

Source: U.S. Treasury, Barclays Capital, FactSet, J.P. Morgan Asset Management. Fixed income sectors shown above are provided by Barclays Capital and are represented by Barclays U.S. Aggregate; TIPS: Barclays U.S. Treasury Inflation Protected Notes (TIPS); Floating Rate: Barclays FRN (BBB); High Yield: Corporate High Yield Index; EMD ($): Emerging Markets (USD); MBS: MBS Index; Municipals: Barclays U.S. 1-5 Year Blend (1-6) Municipal Bond Index, Barclays U.S. 1-15 Blend (1-17) Municipal Bond Index, Barclays Municipal High Yield Index. Data as of 12/31/15. This chart is for illustrative purposes only.

UNCORRELATED ASSETS CAN IMPROVE PORTFOLIO RETURNS AND LOWER VOLATILITY

Core bonds -- both taxable and tax-exempt -- have typically had little or no correlation to major equity markets. That is, equity and bond prices have tended not to move in the same direction at the same time. In addition, core bonds have historically been less volatile than stocks. All other things being equal, lower volatility in and of itself can improve overall portfolio returns. As a result, combining a broad mix of stocks with strategically diversified fixed income investments can improve a portfolio's balance of return opportunity and expected risk.

High-quality bonds have negative correlations to equities

CORRELATION TO THE S&P 500 1.00

0.57

0.62

0.04

-0.10

-0.09

-0.31

S&P

BC Muni 1?17

BC Agg

BC US Treasury

BC EMD

BC US HY

Commodity Index

Source: Standard & Poor's, Barclays Capital Inc., MSCI Inc., DJ UBS, J.P. Morgan Asset Management. Data as of 12/31/15.

Correlation to Core Bonds as represented by the Barclays U.S. Aggregate Index. Indexes used: U.S. Equities: S&P 500 Index; Corporate High Yield: Barclays Corporate High Yield; EMD: Barclays Capital Emerging Market Index; Municipal Bonds: Barclays Blend 1-15 Year (1-17 Y); TIPS: Barclays U.S. Treasury Inflation Protected Notes (TIPS); Treasuries: U.S. Treasuries. All correlation coefficients calculated based on monthly total return data for period 12/31/03 to 12/31/15. This chart is for illustrative purposes only.

2 ALLOCATION SOLUTIONS -- EVOLVING YOUR FIXED INCOME STRATEGY

Fixed income

DIVERSIFICATION MAY HELP REDUCE RISK AND PROVIDES ACCESS TO BROADER OPPORTUNITIES

The performance of individual fixed income sectors can be volatile. As with stocks, a portfolio concentrated in one specific bond sector can lead to a bumpy ride. Diversification helps lower portfolio volatility and can reduce the impact of credit, rate and other risks. By allowing access to broader opportunities, diversification can also increase income and improve portfolio performance. For example, a diversified portfolio outperformed taxable core bonds over the past 10 years.

Fixed income sector returns

GTM ? U.S. | 39

INVESTORS CAN BENEFIT FROM DIVERSIFICATION WITHIN FIXED INCOME

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2005 - 2015

Cum.

Ann.

EMD USD 10.2%

EMD LCL. 15.2%

EMD LCL. 18.1%

Treas. 13.7%

High Yield EMD LCL.

58.2%

15.7%

TIPS 13.6%

EMD USD High Yield

17.4%

7.4%

Muni 8.7%

Muni 3.8%

EMD USD 114.0%

EMD USD 7.9%

EMD LCL.

6.3% Asset Alloc. 3.1%

TIPS

2.8%

High Yield

11.8%

EMD USD

9.9% Asset Alloc. 5.7%

TIPS

11.6%

Treas.

9.0% Barclays

Agg 7.0%

Treas. 2.8%

MBS 5.2%

Muni 2.7% High Yield 2.7%

Muni

4.7% Barclays

Agg 4.3%

MBS

6.9% Asset Alloc. 6.7%

EMD USD

6.2%

MBS

2.6% Barclays

Agg 2.4%

Corp. 4.3% Treas. 3.1%

Corp. 4.6% Muni 4.3%

MBS 8.3% Barclays Agg 5.2%

Muni 1.5% Asset Alloc. 0.1%

TIPS -2.4%

Corp. -4.9%

EMD LCL. -5.2%

EMD USD

-12.0%

EMD USD High Yield

29.8%

15.1%

Muni 12.3%

EMD LCL. EMD USD

22.0%

12.2%

Treas. 9.8%

Corp.

18.7% Asset Alloc. 14.7%

TIPS

11.4%

Corp.

9.0% Asset Alloc. 7.9% Barclays Agg 6.5%

Corp.

8.1% Asset Alloc. 8.1% Barclays Agg 7.8%

Muni

9.9% Barclays

Agg 5.9%

TIPS 6.3% Treas. 5.9%

EMD USD 7.3% MBS 6.2%

MBS

MBS

High Yield

5.9%

5.4%

5.0%

EMD LCL. 16.8%

High Yield 15.8%

Corp. 9.8% Asset Alloc. 7.4%

TIPS 7.0%

Muni 5.7% Barclays Agg 4.2%

MBS

2.6%

MBS -1.4%

Corp. -1.5% Asset Alloc. -1.9% Barclays Agg -2.0%

Muni -2.2%

Treas. -2.7%

EMD USD -5.3%

TIPS

-8.6%

Corp. 7.5%

EMD USD 7.4%

MBS 6.1% Barclays Agg 6.0% Asset Alloc. 5.5%

Treas. 5.1%

TIPS 3.6%

High Yield

2.5%

MBS 1.5%

EMD USD 1.2%

Treas. 0.8% Barclays Agg 0.5% Asset Alloc. -0.3%

Corp. -0.7%

TIPS -1.4%

High Yield

-4.5%

High Yield 101.3%

Muni 70.6%

Corp. 70.2% Asset Alloc. 69.4%

EMD LCL. 62.0%

MBS 61.4% Barclays Agg 59.3%

Treas.

54.8%

High Yield 7.2%

Muni 5.5%

Corp. 5.5% Asset Alloc. 5.4%

EMD LCL. 4.9%

MBS 4.9% Barclays Agg 4.8%

Treas.

4.5%

Corp.

TIPS

High Yield High Yield Treas.

Muni

EMD LCL. Treas. EMD LCL. EMD LCL. EMD LCL.

TIPS

TIPS

1.7%

0.4%

1.9%

-26.2%

-3.6%

4.0%

-1.8%

2.0%

-9.0%

-5.7%

-14.9%

51.2%

4.2%

Source: Barclays Capital, FactSet, J.P. Morgan Global Economic Research, J.P. Morgan Asset Management.

SPoausrtcpe:eBrfaorrcmlaaynscCeapisitnaol,tFiancdtiSceatt,ivJe.Po. Mf fourtguaren rGelotubranlsE.cFoinxoemd iicncRoemseearscehc, tJo.Prs. MshoorgwannaAbsosevteMaarenapgreomviednetd. by Barclays Capital unless otherwise noted and

Paarestrpeeprrfeosremnatnecdebiys nBortoainddiMcaatrivkeeto: fBfaurtculraeyrseCtuarnpsit.aFl iUxe.Sd.inAcgogmreegsaetcetoIrnsdsehxo;wMnBaSb:oFveixaerdeRparotevidMeBdSbyInBdaerxc;laCysorCpaopriatatel :uUnl.eSs.sCoothrperowraistesn;oMteudnaicnidpaalrse: represented by Broad Market:

BTEMarasmeursacneusliramugByriesoinesngCsdat:hDpG1eeilt0obaf-boltYalUUlelo.SaSUw.rD.iSnAI:.nggJTdg.rwerPeeexa.g;isgMauHhtroeitygsr;gIh:nTa2dYInP0eiSe%xE:;ldMGMi:nlBBoUMIbSG.S:aBlF.DSIiCxni,vefo2ledar0rptRs%iooiafrnitaeie-ntLdeMiCnInHBkodSeirgpedIhnox-;drYaUeEit.xeeSm;l.,dC1eTo5rIIgnPr%pidsno;egirEnxam;DtMeTee:urrbegUntaii.nLcSsgiC.upCrDLaioe:lesrsbJp,:.to5PGUr%.aSlMotDeibno:sa;rJElg.MPmUa.un.eMnSriEo.cgirMTipngragaeGlnsaDl:osEMeubMbruaBytnl;IUiIGnBSTdDoIDePinvx,dSe.5r:1T%s0Gihf-ileYieonedb"aEAaIrnmsl dIsIneneedrfxtlge;aAixEtni;lmoglHonecDi-graLeghtiiibnonYtkgnieeL"DldCdpe:L-obU,rUtt.1fSL.o0S.Cl%i.CLoo:TirJIn.PpPos.r;MatoergHaignhEYMieGldloIbnadleIxn;dex.

39

THhigeh"AYsiseeldt ,A2ll0o%catiinonT"repaosrtufroileios,a5s%sumineTs ItPhSe .foAlslosweitnagllwoceaigthiotns: p2o0r%tfoilnioMaBsSs,u2m0e%s iannCnouraplorreabtea,la15n%cining.Municipals, 5% in Emerging Debt USD, 5% in Emerging Debt LCL, 10% in High YGieulidd,e2t0o%thien TMraearkseutrsie?s,U5%.S.inDTaItPaSa. rAessaest oaflloDceactieomn bpeorrt3fo1l,io20a1ss5u.mes annual rebalancing.

Guide to the Markets ? U.S. Data are as of December 31, 2015.

This commentary is intended solely to report on various investment views held by J.P. Morgan Asset Management. Opinions, estimates, forecasts and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. These views and strategies described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. The information is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Past performance is no guarantee of future results. Please note that investments in foreign markets are subject to special currency, political and economic risks. The manager seeks to achieve the stated objectives. There can be no guarantee the objectives will be met.

J.P. MORGAN ASSET MANAGEMENT 3

INVESTMENT INSIGHTS

TAXABLE STRATEGY

FIND THE APPROPRIATE MIX FOR YOUR FIXED INCOME PORTFOLIO

Institutional investors tend to broadly diversify their fixed income portfolios. Individual investors, who have historically diversified their equity risk, also need to ensure that their fixed income investments are appropriately diversified. When considering the right mix of investments, it's important to: ? Think strategically about augmenting your core bond holdings with complements and extended sectors ? Adjust allocations to reflect your market and interest rate outlook ? Consider your goals and risk tolerances

An appropriately diversified fixed income portfolio can potentially deliver better results and help investors achieve their goals with the right balance of market risk and opportunity.

Core

? Core bonds provide income and diversification to stocks, but rising rates and low yields present challenges.

? Active management mitigates risk by selecting bonds with the optimal mix of yield and return potential versus credit risk and duration.

Core Complements

? Strategies that seek returns uncorrelated to traditional bond markets and/or benefit from the impact of inflation can hedge downside risk and reduce volatility.

Extended

? Extended sectors can provide income and the potential for returns but can also be volatile.

? Corporate high yield bonds and bank loans typically outperform during periods of rising rates and economic growth but require frequent evaluation.

? Global bonds provide additional diversification and access to growth.

EXTENDED SECTORS Seeks income and total return

CORE COMPLEMENTS Seeks reduced correlations to core holdings

Emerging markets International/global High yield Bank loans

Absolute return Inflation hedge

CORE HOLDINGS Seeks lower volatility and diversification to equities

Sector-specific [Mortgage-backed, corporates, governments, etc.]

High-quality intermediate-/short-term

TOP-DOWN

BOTTOM-UP

Shown for illustrative purposes only. Because everyone's circumstances are unique, these models can provide a framework for discussion between you and your financial advisor. They should not be taken as one-size-fits-all investment advice. Asset allocation/diversification does not guarantee investment returns and does not eliminate the risk of loss.

4 ALLOCATION SOLUTIONS -- EVOLVING YOUR FIXED INCOME STRATEGY

PORTFOLIO ALLOCATIONS ARE DEPENDENT ON THE INTERACTION OF SEVERAL FACTORS

Goals

Interest rate and inflationary environment

Risk tolerance

Time horizon

Are you seeking capital preservation, income or a

combination of both?

Will, when and how fast will rates change?

How much risk are you willing to accept?

Are you focused on the short term or long term?

RANGE-BOUND

INTEREST RATE ENVIRONMENTS

SLOW RISE

RAPID RISE

INCOME

Extended 25?35% Emerging markets International/global High yield Bank loans

Complements 10?20% Absolute return Inflation hedge

Core 50?60% Intermediate top-down Intermediate bottom-up Short-term

Extended 30?40% Emerging markets International/global High yield Bank loans

Complements 15?25% Absolute return Inflation hedge

Core 40?50% Intermediate top-down Intermediate bottom-up Short-term

Extended 35?45% Emerging markets International/global High yield Bank loans

Complements 20?30% Absolute return Inflation hedge

Core 30?40% Intermediate top-down Intermediate bottom-up Short-term

GOALS

CAPITAL PRESERVATION

Extended 20?30% Emerging markets International/global High yield Bank loans

Complements 10?20% Absolute return Inflation hedge

Core 55?65% Intermediate top-down Intermediate bottom-up Short-term

Extended 25?35% Emerging markets International/global High yield Bank loans

Complements 25?35% Absolute return Inflation hedge

Core 35?45% Intermediate top-down Intermediate bottom-up Short-term

Extended 25?35% Emerging markets International/global High yield Bank loans

Complements 45?55% Absolute return Inflation hedge

Core 15?25% Intermediate top-down Intermediate bottom-up Short-term

Shown for illustrative purposes only. Because everyone's circumstances are unique, these models can provide a framework for discussion between you and your financial advisor. They should not be taken as one-size-fits-all investment advice.

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