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JPMorgan US Research Enhanced Equity I JDESX

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Morningstar’s Analysis

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Our analysts assign Neutral ratings to strategies they’re not confident will outperform a relevant index, or most peers, over a market cycle.

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Summary

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JPMorgan US Research Enhanced Equity's analyst team has seen some turnover, and its benchmark-sensitive approach doesn't stand out in a competitive space. The strategy receives a Morningstar Analyst Rating of Neutral across all share classes.

An experienced lead manager is at the helm, but J.P. Morgan's central analyst team drives this fund’s picks. Longtime comanager Raffaele Zingone became the lead here in late 2016. He's spent his entire three-decade career at J.P. Morgan. Zingone is responsible for portfolio construction and leverages views from the firm's equity research group. The approximately 25-person team averages 20 years of industry experience, but continued analyst turnover is worth watching. Over the trailing 12 months through August, the team had three analyst departures, including two consumer analysts. Listed manager Timothy Snyder does not play an active role in the strategy. The same was true for former comanager Steven Lee, who left the strategy in November 2020 but remains on his other charges at the firm.

Zingone's approach is tightly constrained. He uses a model that considers analysts' valuations, firm-specific growth catalysts, and confidence in long-term trends to highlight the most attractive firms. With the goal of offering fundholders market exposure similar to the S&P 500, Zingone then sticks to tight constraints to build the portfolio. He keeps the strategy's tracking-error target to 1.5% versus the benchmark and the portfolio's super sectors within 0.2 percentage points of the bogy. Individual positions cannot deviate more than 1 percentage point. These narrow constraints mean that stock-picking drives returns, but it can also limit the portfolio's distinctiveness; as of July 2021, the portfolio's active share (a measure of differentiation in names and weightings from a benchmark) was just 36%.

Fees here are attractive versus actively managed peers, but they're pricey next to the passive alternatives that this strategy's structure resembles.

Process

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This strategy doesn't stand out and warrants an Average Process rating.

Lead manager Raffaele Zingone leverages J.P. Morgan's central analyst team to construct his approximately 200-stock portfolio. Sector specialists forecast earnings eight years out for 600-plus companies and incorporate those forecasts into their valuations, which are then used to rank names under coverage in each sector. Zingone uses a model that considers analysts' valuations, firm-specific growth catalysts, and confidence in long-term trends to highlight the most attractive firms.

Zingone then constructs a portfolio within relatively strict limits. He keeps the strategy's tracking-error target to 1.5% versus the S&P 500 and the portfolio's super sectors (finance, technology, healthcare, consumer, and industrials/commodities) within 0.2 percentage points of the bogy. Individual positions cannot deviate more than 1 percentage point. Such narrow sector constraints mean that stock-picking, rather than sector allocations, will drive returns, but it can also limit the portfolio's distinctiveness.

Sticking to these tight constraints could spur portfolio turnover, but Zingone has kept trading reasonable. Over the past four calendar years through 2020, turnover averaged 47% versus the typical large-blend Morningstar Category peer's 69%.

People

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An experienced group drives this strategy's picks, but continued analyst team turnover warrants an Average People rating.

Raffaele Zingone, who has comanaged here since 2002, became the strategy's lead manager in November 2016. Zingone joined J.P. Morgan and the industry in 1991. He has managed a handful of U.S. equity offerings, though his manager tenure here since 2002 is his longest. Listed comanager Tim Snyder joined in 2016 after serving as an analyst at the firm for more than a decade. He isn't involved in the day-to-day decision-making and primarily serves as a backup manager. The same was true for former comanager Steven Lee, who left the strategy in November 2020 but remains on his other charges at the firm.

J.P. Morgan's deep bench of roughly 25 equity analysts, who average 20 years of industry experience and 11 years at the firm, are the foundation of this approach. The analysts specialize by sector and provide most of the stock-specific research for this strategy's roughly 600-stock universe, a feasible task for a team of this size. The analyst team has seen some departures in recent years, and that's concerning for this analyst-driven portfolio. The group has had attrition across sectors, including two consumer analysts and a financials analyst over the trailing year through August 2021.

Manager ownership is solid. Zingone invests more than $1 million in the fund.

Parent

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J.P. Morgan Asset Management’s strong investment culture, which shows through its long-tenured, well-aligned portfolio managers and deep analytical resources, supports a renewed Above Average Parent rating.

Across asset classes and regions, the firm's diverse lineup features many Morningstar Medalists, such as its highly regarded U.S. equity income strategy that’s available globally. There's been some turnover in the multi-asset team recently, but it remains deeply resourced and experienced. Manager retention and tenure rates, and degree of alignment for U.S. mutual funds compare favorably among the competition. Managers' compensation emphasizes fund ownership over stock ownership, which is distinctive for a public company.

The firm continues to streamline its lineup and integrate its resources further. For instance, in late 2019, the multi-asset solutions division combined with the passive capabilities. The firm hasn’t launched trendy offerings as it’s mostly expanded its passive business lately, but acquisition-related redundancies and more hazardous launches in the past weigh on its success ratio, which measures the percentage of funds that have both survived and outperformed peers. Fees are regularly reviewed downward globally; they're relatively cheaper in the U.S. than abroad. Also, the firm is building its ESG capabilities and supports distinctive initiatives on diversity.

Price

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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 cheapest quintile. Even so, based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we don’t think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Neutral.

Performance

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This strategy has edged its benchmark over manager Raffaele Zingone's tenure as lead manager. From November 2016 through August 2021, the institutional shares gained 19.5% annualized, outpacing the S&P 500 and large-blend category peer average by 0.3 and 2.6 percentage points, respectively. Zingone and his analysts achieved this with slightly higher volatility (as measured by standard deviation) and captured 104% of the index's losses in market downturns. As such, the strategy's Morningstar Risk-Adjusted Returns for the period weren't as attractive.

The strategy posted solid results in 2020. The fund fell further than its bogy and most peers during the first quarter market plunge. Consumer discretionary and financials names hurt most, with names such as Expedia Group EXPE and Citigroup C among the larger detractors. From the index's March 23 trough through the end of the year, however, the fund posted competitive results. Technology picks drove the outperformance, but stock selection was sound across most sectors. Overweightings in relative winners PayPal Holdings PYPL, Apple AAPL, and NXP Semiconductors NXPI helped the fund outpace its benchmark over the calendar year.

The strategy has also fared well thus far in 2021's cyclical-led market. The team's technology names, including Applied Materials AMAT and Microsoft MSFT, have contributed most to the strategy’s edge over its benchmark from the start of the year through August.

Portfolio

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Raffaele Zingone's tight-to-the-bogy constraints result in a benchmark-like portfolio. He aims for the strategy to be factor- and sector-neutral relative to the S&P 500. Sector weightings remain within 0.2 percentage points of the benchmark's, and the strategy must maintain a tracking error below 1.5%. While there are no hard limits for factor exposures such as growth and momentum, Zingone says he keeps them close to the index's. These risk controls help ensure that stock selection is the key driver of performance. Individual holdings must stay within 1 percentage point of the bogy's weightings, but most stay much closer; the portfolio’s average active bet size as of July 2021 was just 0.2 percentage points. The team's largest active weighting that month was its 6.7% allocation to Microsoft MSFT, 0.9 percentage points greater than the benchmark's. Zingone may hold names that the analysts don't view favorably, but he'll typically keep those stakes below the index's. All told, the portfolio often has a modest active share (a measure of differentiation in names and weightings from an index); in July 2021, it was just 36%.

The team bought top-10 position Tesla TSLA in December 2020 following the name’s addition to the index. The team favors the company’s long-term outlook, but its volatility and price tag have the position size close to the benchmark’s.