JPMorgan Mid Cap Value L FLMVX

The JPMorgan Mid Cap Value strategy, which includes VY JPMorgan Mid Cap Value, remains a strong choice even after its longtime comanager retires.

Jonathan Simon’s four decades of industry experience and stock-picking acumen will be missed after he retries in early 2025, but there are still plenty of positives here. Larry Playford, who has comanaged the strategy alongside Simon since the start of 2005, will assume full control of the portfolio. He’s a veteran investor himself and has displayed strong stock-selection prowess across the technology, energy, utilities, materials, and industrials sectors for which he maintained authority. Playford had long been the planned successor for Simon’s eventual retirement, so he is well prepared for the transition. While Simon will remain attached to the strategy in the interim, Playford will start calling the shots prior to the 2025 official retirement date.

A stronger supporting cast also lends confidence in this strategy’s prospects. Playford, who formerly served as CIO of the firm’s value-equity department, was instrumental in building out a dedicated team of analysts here from 2016 to 2019. That five-person group has been steady and contributed to good results.

This strategy’s quality-oriented approach to value investing should endure. Playford will continue to look for good businesses trading at reasonable (or cheap) valuations where the market has mispriced their prospects. Playford figures to keep a long-term framework, too, with turnover likely to remain below that of the average mid-value fund. However, there may be changes on the horizon. For instance, Simon was typically a fan of financials stocks and overweighted that segment versus the Russell Midcap Value Index benchmark for the past decade. Playford may not keep the same stance. Still, he shares Simon’s preference for companies with higher-quality balance sheets and stable deposit bases. Even if there are some changes on the margin, the portfolio shouldn’t change drastically.

After slightly trailing the benchmark in 2023’s up market, JPMorgan Mid Cap Value’s L shares gained 9.4% for the year to date through March 2024, which came ahead of the benchmark and beat about 75% of peers. The fund still has a good shot of outperforming on a risk-adjusted basis moving forward.

The framework here should endure without comanager Jonathan Simon. Larry Playford has successfully employed the hybrid quality-and-value approach for many years. Both he and Simon prefer steadier businesses with lower revenue cyclicality and earnings volatility. The ideal stock has a healthy return on capital, reliable profitability, and a reasonable valuation. But they are willing to wade into stocks with greater uncertainty or operational headwinds as long as they feel strongly that the company has the financial strength to withstand a temporary rough patch. They pay close attention to position sizing to ensure higher-risk bets are smaller.

A stock’s enterprise value relative to its pretax earnings and its cash flow yield are some of the preferred metrics to assess a stock’s worth. The managers are long-term investors, often looking out three to five years ahead. They are typically inclined to ride winners but are also keen to trim their gains to redeploy capital into cheaper stocks.

Historically, these parameters have produced a portfolio of relatively durable companies that has held up well in volatile market stretches such as 2008, 2011, and 2015 (all years when the benchmark produced a negative return). While performance stumbled in 2018's and 2020’s drawdowns as the managers misjudged the quality of certain holdings, it rebounded in 2021 and fared relatively better in 2022 thanks to better underwriting and portfolio positioning.

This strategy’s portfolio fits with its process. The core of the portfolio usually lands on the border of the value and blend sections of the Morningstar Style Box, reflective of the managers’ focus on the combination of growth, profitability, and valuation. The portfolio’s profitability metrics, such as average return on assets, are typically higher than the Russell Midcap Value Index. Such characteristics are often supported by a form of competitive advantage. Longtime holding AutoZone AZO receives a wide Morningstar Economic Moat Rating thanks to its brand and cost advantages, while orthopedic product maker Zimmer Biomet Holdings ZBH also carries a wide moat thanks to intellectual property and high switching costs.

The portfolio is well diversified across sectors and individual positions, usually holding 90-120 stocks, with 15%-20% of assets invested in its top 10 holdings. No stock can exceed a 5% weighting in the portfolio. However, the managers ensure there is sufficient differentiation from the Russell Midcap Value Index and aren’t afraid to be over- or underweight particular sectors or industries. Banks represented the largest industry overweighting as of March 2024 at about 3 percentage points. Mid-caps make up most of the portfolio, though they’ll make way for a smattering of small and large caps. Cash is typically below 5% of assets.

Simon will formally retire in early 2025 but will hand over control before then to longtime comanager Larry Playford. Simon has served here since the mutual fund’s 1997 inception and will surely be missed. However, Playford is ready for the challenge and is already familiar with the portfolio’s holdings across sectors. While he formerly held decision-making authority across five of the 11 economic sectors that divide the universe of stocks, he’s collaborated with the analysts and Simon in team meetings since 2020. He’ll also work alongside Simon during the transition to his sole control.

Playford’s sectors have performed well since he became a comanager at the start of 2005, which lends confidence in his abilities. While he and the strategy’s prior managers relied on shared core/value analyst resources for much of their tenure early on, dedicated analysts joined from 2016 through 2019, giving this strategy a more dependable pool of idea generators and research firepower. That team of five has remained stable.

As of 2022, this investment stalwart manages more than USD 2.5 trillion in AUM. Composed of various global cohorts and diverse asset classes, the firm has more tightly integrated its capabilities in recent years, notably through the development of proprietary analytical and risk systems. Investment teams are robustly staffed and helmed by seasoned contributors. The firm’s strategies tend to produce reliable portfolios, and several flagship offerings are Morningstar Medalists. Manager incentives align with fundholders'; compensation reflects longer-term performance factors, and portfolio managers invest in the firm’s strategies as part of their compensation plans.

The firm’s funds tend to be well-priced, but they aren’t as competitive as many highly regarded peers of similar scale. Recent product launches include thematic and single-country strategies, both of which carry the potential for volatile performance and flows, along with misuse by investors. The firm remains intrepid when it comes to developing an environmental, social, and governance-focused framework and continues to move into other areas such as direct indexing through its 55iP acquisition and China through its joint venture, but these complicated initiatives take time to assess any real and lasting effect.

From its November 1997 inception through March 2024, JPMorgan Mid Cap Value’s L shares gained 11.8% annualized, outpacing the Russell Midcap Value Index benchmark by 2.3 percentage points. However, the bulk of that outperformance came early in the fund’s life. Since 2004, the fund has still tended to come ahead of the benchmark over various long-term holding periods, but the edge has been narrower and less consistent. It has, however, reliably beaten the mid-value category average. As of March 2024, the fund landed in the second quartile of peers over the trailing 10-and 15-year periods. Its results also get a boost after considering its lower risk profile(as measured by standard deviation), leading to benchmark-beating risk-adjusted performance.

The strategy’s quality focus typically pays off in down markets and hurts in up markets. It outperformed the benchmark in difficult years like 2008, 2011, and 2015 but notably lagged in 2009's and 2013’s rallies. However, it didn’t fare well in 2018 and 2020—two years featuring steep declines—because of stock-picking woes. To the managers’ credit, the fund rebounded versus the benchmark in 2021 and in 2022 thanks to better underwriting and portfolio positioning.

The fund trailed the benchmark and two thirds of peers in 2023, mostly owing to subpar performance from consumer discretionary stocks. However, it bounced back through the first quarter of 2024, outpacing the benchmark and nearly three fourths of peers thanks to better picks across multiple sectors.

Based on our assessment of the fund’s People, Process, and Parent Pillars in the context of these expenses, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Medalist Rating of Silver.