JPMorgan Mid Cap Value L FLMVX

The JPMorgan Mid Cap Value strategy, which includes VY JPMorgan Mid Cap Value, benefits from accomplished managers and strong process parameters. It earns Morningstar Analyst Ratings of Silver and Bronze, depending on share class fees.

After missteps led to subpar results in 2018 and 2020’s market drawdowns, managers Jonathan Simon and Larry Playford have righted the ship. In 2021, the two redoubled their efforts to ensure portfolio companies were resilient and profitable enough to thrive in an adverse environment, explaining why the strategy’s roughly 16.7% decline through the first nine months of 2022 fared better than nearly two thirds of peers and the Russell Mid Cap Value benchmark.

Simon and Playford’s flavor of value investing places greater emphasis on financial health than some rivals, helping it hold up better in market sell-offs over its more than 20-year history. The managers prefer companies with healthy balance sheets and low product obsolescence risk that are cheap because of cyclical or non-secular headwinds, or have value to be unlocked through corporate action or management change. Despite a preference for quality, the managers’ willingness to move on from winners and towards cheaper stocks keeps the portfolio’s style profile in the value section of the Morningstar Style Box.

The comanagers’ many years of experience continue to serve the strategy well. Each retains a separate realm of control: Simon holds authority on financials, health care, consumer, and real estate picks, while Playford takes technology, materials, utilities, industrials, and energy. They leverage a six-person dedicated analyst team with ample industry experience, though some are newer to the group. While Simon is in his early 60s, he hasn’t yet indicated a retirement timetable. When that time comes, the strategy will likely be under Playford’s sole control. Investors should take solace in the strong performance of Playford’s sectors and his long tenure with the team. Either way, the strategy will remain in capable hands.

Despite a couple blemishes in recent years, this strategy’s investment parameters are sound and have been constant over time, resulting in an Above Average Process rating.

Managers Jonathan Simon and Larry Playford have successfully employed their hybrid quality-and-value approach for many years. Both managers prefer steadier businesses with lower revenue cyclicality and earnings volatility. Their ideal stock has a healthy return on capital, reliable profitability, and trades at a reasonable valuation. But they are also 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. The managers pay close attention to position sizing to ensure higher-risk bets are smaller.

A stock’s enterprise value relative to its pretax earnings power and its cash flow yield are some of the managers’ favorite metrics to assess a stock’s worth. The managers are long-term investors, often looking out three to five years ahead.

Historically, these parameters have produced a portfolio of relatively durable companies that 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 and 2020’s drawdowns as the managers misjudged the quality of certain holdings, it rebounded in 2021 and fared relatively better through the first nine months of 2022’s down market thanks to better execution.

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. Measures of profitability, such as average return on assets, typically come in higher than the Russell Midcap Value Index. Such characteristics are usually supported by a form of competitive advantage. Longtime holding Autozone AZO receives a narrow Morningstar Economic Moat Rating thanks to its brand and cost advantages, while companies such as orthopedic product maker Zimmer Biomet Holdings ZBH carry wide moat ratings.

The portfolio is well diversified across sectors and individual positions, usually holding 90-120 stocks with 15%-20% of assets invested in the 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 in particular sectors or industries. Mid-caps make up most of the portfolio, though the managers make way for a smattering of small and large caps, though they won’t initiate a position in a stock with a market cap greater than that of the largest company in the benchmark.

Veteran and accomplished portfolio managers support an Above Average People rating.

Two long-tenured managers anchor this strategy. Jonathan Simon has served here since the mutual fund’s 1997 inception. He is joined by Larry Playford, who started at JPMorgan in 1993 and became a comanager at the end of 2004 following two years as analyst. They’ve overseen a strong run of performance powered by stock selection, though results have tapered off some since 2016. They were joined by comanager Gloria Fu from 2006 until February 2019, when she left after a period of poor performance in her consumer stock picks. The managers relied on shared core/value analyst resources for much of their tenure but added dedicated analysts from 2016 through Fu’s departure in 2019.

Simon makes the calls in the financials, real estate, healthcare, and consumer sectors, while Playford is accountable for decisions in the industrials, materials, utilities, energy, and technology sectors. Though their responsibilities differ, the managers meet with analysts jointly to gather insights.

Simon is now in his early 60s but intends to keep managing the fund for the near future. Playford’s experience and stock-picking success, along with a larger analyst team, should help ensure an orderly transition once Simon does step away.

A well-resourced, thoughtful, and disciplined steward of client assets, JPMorgan Asset Management maintains an Above Average Parent rating.

As of 2022, this investment stalwart manages more than USD 2.5 trillion in AUM. Composed of various cohorts globally and a diverse set of 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.

This strategy’s long-term track record is stellar, though its advantage has dwindled over time. From its November 1997 inception through September 2022, the 11.2% annualized return of JPMorgan Mid Cap Value’s L shares easily outpaced the Russell Midcap Value Index’s 8.8%. However, much of that difference owes to the fund’s performance from inception through 2003. From that point onward, the fund has still tended to come ahead of the boey over various long-term holding periods, but the edge has been narrower and less consistent. Its case looks better relative to peers, as it has consistently beaten the mid-value Morningstar Category average. As of September 2022, it landed in the second quartile of peers over the trailing 10-year period and in the first quartile over the 15-year period. Its results also get a boost after considering risk (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 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, they rebounded versus the benchmark in 2021 and through the first nine months of 2022.

It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s second-cheapest quintile. Based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Silver.