JPMorgan Value Advantage A JVAAX

Jonathan Simon will retire from portfolio management in early 2025, J.P. Morgan announced. Simon, who has worked at the firm for over four decades, amassed strong records on his charges and will surely be missed.

His successor on this strategy will be Scott Blasdell, manager of JPMorgan Large Cap Value OLVAX. Simon's hand-picked comanager, Graham Spence, will remain in his current role. Considering the news, the strategy's Morningstar Analyst Rating is now Under Review.

JPMorgan Value Advantage's Morningstar Analyst Rating is Under Review following news of its lead manager's pending retirement. The rest of this analysis is as of Oct. 23, 2023

Longtime manager Jonathan Simon has piloted this flexible value offering for nearly 20 years and brings 40 years of experience, making him one of the most tenured managers in the large-value Morningstar Category. While he likely isn’t far from retirement, he hasn't given an indication that it is imminent. Comanager Graham Spence is Simon's protégé and is a potential successor. Simon's roots in mid-cap investing loom large for this all-cap strategy, which typically keeps 20% to 40% of assets in the cohort. Simon comanages JPMorgan Mid Cap Value FLMVX and can pull ideas from that fund, which has a dedicated analyst team. Simon also leans on J.P. Morgan's deep core analyst group, which has helped power strong performance across most of the firm's large-cap lineup.

At his core, Simon is a quality-oriented investor who anchors to companies with stronger financials than peers and better competitive positions. However, he has made exceptions on occasion to pursue companies undergoing distress or with higher debt loads. He's had mixed success with such ventures, and they contributed to a volatility spike from 2018-20. Simon has limited such trades in recent years, though.

Simon's sector preferences are a notable feature of the strategy. For instance, he has long favored financials stocks because of their relatively cheap valuations since the financial crisis. Conversely, he tends to underweight tech stocks, which he partially attributes to lingering hesitancies stemming from the dot-com bubble, and a general aversion to paying up for growth far into the future.

Simon is a long-term investor but will take advantage of volatility if he sees an opportunity. For instance, he reallocated his financials exposure during March 2023's regional banking crisis. He picked up shares of banks he believed had durable deposit bases with relatively lower asset duration, such as Regions Financial RF while trimming shares of those deemed to have greater risk.

This offering shouldn't stray too far from the composition of the Russell 3000 Value prospectus benchmark, but it has enough differentiation and research talent behind it to give it a shot at outperforming.

Lead manager Jonathan Simon normally gravitates toward financially strong companies, but he'll make exceptions here if the price is right. He generally prefers less cyclical businesses led by management teams with significant personal investment. He has historically shied away from areas such as energy and industrials in favor of consumer stocks. However, he’ll embrace risk in certain situations. He's made select investments in struggling companies, such as Entercom Communications (now Audacy AUD), that took on debt to fuel their growth, only to suffer when results failed to materialize. Such purchases didn’t appear in his other charge, JPMorgan Mid-Cap Value, which maintains a higher-quality focus. Poor performance from deeper-value plays eroded the strategy's typical advantage in down markets, most notably from 2018 through 2020. However, since he maintains a diversified portfolio and doesn't concentrate his bets, the strategy was spared from steeper losses. To his credit, performance rebounded in 2021 and held up relatively well in 2022's volatile market.

Simon's long-term mindset endures on this strategy. He trades infrequently, resulting in low annual portfolio turnover, often below 30%.

This all-cap strategy used to be more heavily invested in small- and mid-cap stocks, but asset growth pushed it into the more-liquid large-cap segment. Large caps have taken up about 60% of the portfolio since 2011, though mid-caps remain a key differentiator from its large-value category peers and Russell 3000 Value Index benchmark. The strategy held 38% of assets in mid-caps as of August 2023. The portfolio typically holds around 120 stocks with 20% to 25% invested in its top 10 holdings, making it well diversified.

While he is conscious of his positioning relative to the Russell 3000 Value Index, Jonathan Simon isn't afraid to make meaningful active bets. He doesn't own large index constituents, such as Exxon Mobil XOM and Comcast CMCSA, and he holds some stocks outside of the benchmark such as small-cap fuel-products retailer Murphy USA MUSA. He also held Microsoft MSFT for more than a decade prior to selling the position in July 2021.

The portfolio's sector positioning reflects Simon's style. He has historically favored financials because of their higher yields and below-market valuations and shied away from technology stocks because he is more hesitant to pay up for the promises of higher growth in the future. The portfolio's average price multiples, such as price/earnings, still tend to hover around those of the benchmark given Simon's broader focus on financially strong companies, which tend to be pricier relative to their fundamentals.

Simon has run this strategy since its 2005 inception and has more than $1 million invested here. He started as an analyst at Robert Fleming in 1980 and became a portfolio manager in 1987. Comanager Lawrence Playford focuses more heavily on JPMorgan Mid Cap Value and influences this all-cap portfolio mostly through his work on that fund. In November 2020, the team promoted Graham Spence, who had supported Simon on this strategy as an assistant portfolio manager since 2013, to comanager. Unlike Playford, Spence is an active member of the research staff and collaborates with Simon on portfolio positioning and company analysis.

Simon borrows small- and mid-cap ideas from dedicated analysts on other strategies but leverages J.P. Morgan's core research team for large caps. That group has more than 20 members, most having between 10 and 20 years of industry experience.

While Simon hasn't indicated his retirement is imminent, there isn’t a clear successor at the moment should he step away unexpectedly. Spence figures to play a larger role in the future and could ultimately take the reins, though he lacks other money management experience. While questions loom, the strategy remains in capable hands for now.

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.

However, much of that edge stemmed from the fund’s performance from inception through 2011, when it was much more heavily invested in small-and mid-cap stocks. Since large caps became the bulk of the portfolio, the outperformance has become weaker and less consistent. Still, the fund came ahead of the benchmark and average large-value category peer over the trailing three-, five-, and 10-year periods ended September 2023.

Because of slightly higher volatility since 2018, the fund's risk-adjusted outperformance isn’t as strong, though. From 2018 through 2020, the volatility of returns increased as did the portfolio’s beta, a measure of sensitivity to the market. While competitively advantaged companies such as Microsoft, AutoZone AZO, and Home Depot HD buoyed long-term performance, companies with greater leverage and weaker business trends hurt results. Companies with flagging profits, such as Dish Network DISH, or heavier debt burdens, such as Entercom Communications (now Audacy) and Coty COTY, experienced significant losses.

Yet smart position sizing minimized the damage from such errors and gave manager Jonathan Simon the chance to dig out of the hole. In 2021 and 2022, strong stock picks propelled the fund to benchmark-beating performance.

The first nine months of 2023 didn't go as well due to a roughly equal combination of modestly negative sector positioning and stock selection relative to the index.