JPMorgan Equity Index I HLEIX Fund Analysis

JPMorgan Equity Index I’s strong process and parent firm are the foundation for this strategy's Morningstar Quantitative Rating of Silver. The portfolio maintains a sizable cost advantage over competitors, priced within the least expensive fee quintile among peers.

The strategy's effective investment philosophy supports a High Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an overweight in liquidity exposure and volatility exposure compared with category peers. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And high volatility exposure is rooted in stocks that have a higher standard deviation of returns. The strategy belongs to a strong asset-management firm that earns an Above Average Parent Pillar rating. The firm, for example, has had a competitive lineup success ratio and overall attractive fees. Finally, the equity team managing the passive strategy earns the strategy an Average People Pillar rating.

Morningstar's evaluation of this fund's process seeks to determine how repeatable, consistent, and reliable it is, and whether management maintains competitive advantage. JPMorgan Equity Index Fund earns a High Process Pillar rating. The investment strategy as stated in the fund's prospectus is:

The investment seeks investment results that correspond to the aggregate price and dividend performance of securities in the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index). The fund invests in stocks included in the S&P 500 Index and also may invest in stock index futures. The fund's adviser attempts to track the aggregate price and dividend performance of securities in the S&P 500 Index to achieve a correlation of at least 0.95 between the performance of the fund and that of the index without taking into account the fund's expenses.

The portfolio has allocations in its top 2 sectors, energy and technology, that are similar to the average portfolio in the category. The sectors with low exposure compared to their category peers are industrials and healthcare; however, the allocations are similar to the average category portfolio. The portfolio is composed of 504 holdings and assets are more dispersed than the typical peer in the category. In the most recent disclosure, 26.1% of the strategy's assets were concentrated in the top 10 fund holdings, as opposed to the category average's 50.0%. And in closing, in terms of portfolio turnover, this fund trades less regularly than the typical peer in its category, which may result in a lower cost to investors.

JPMorgan’s equity team is valuable but does not stand out as one of the industry's best, warranting an Average People Pillar rating. There’s a core bench of four managers listed on the fund: Nicholas D'Eramo, Michael Loeffler, Alex Hamilton, Oliver Furby. The team is well equipped, with an average of 14 years of portfolio management experience. Together, they manage a total of five strategies, with a Silver asset-weighted average combined Morningstar Analyst and Quantitative Rating, indicating the potential to deliver positive alpha relative to the category median in aggregate. This group has been working together for a while and has been successful in retaining talent compared to peers, with no departures in the last five years.

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 Institutional share class' long-term performance is mixed depending on its comparison point. It has provided superior returns compared with peers, but similar returns compared with the category benchmark. This share class led its average peer by an annualized excess return of 1.8 percentage points over a 10-year period. But despite the above-average returns against peers, it mirrored the category index, Russell 1000 Index over an eight-year and 10-year period.

When adjusting for risk, this fund is competitive. The share class had a higher Sharpe ratio, a measure of risk-adjusted return, than the index over the trailing 10-year period. Often, higher returns are associated with more risk. However, this strategy hewed close to the benchmark's standard deviation. However, the share class proved itself ineffective as it was unable to generate alpha, over the same 10-year period, against the category group index: a benchmark that encapsulates the performance of the broader asset class.

It is imperative to evaluate fees, which compound over time and diminish returns. This fund is in the cheapest quintile of its Morningstar Category. Its competitive fee, taken together with the fund’s People, Process, and Parent Pillars, results in a judgment that this share class can deliver positive alpha against the lesser of its median category peer or the category benchmark, explaining its Morningstar Quantitative Rating of Silver.